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2016 Is An Easy Year To Predict

Dec 282015
 
 December 28, 2015  Posted by at 10:48 pm Finance Tagged with: , , , , , , , , ,  4 Responses »


AP Police Officer Carries Aylan Kurdi’s Body, Bodrum Sep 2 2015

No year is ever easy to predict, if only because if it were, that would take all the fun out of life. But still, predictions for 2016 look quite a bit easier than other years. This is because a whole bunch of irreversible things happened in 2015 that were not recognized for what they are, either intentionally or by ‘accident’. Things that will therefore now be forced to play out in 2016, when denial will no longer be an available option.

A year ago, I wrote 2014: The Year Propaganda Came Of Age, and though that was more about geopolitics, it might as well have dealt with the financial press. And that goes for 2015 at least as much. Mainstream western media are no more likely to tell you what’s real than Chinese state media are.

2015 should have been the year of China, and it was in a way, but the extent to which was clouded by Beijing’s insistence on made-up numbers (GDP growth of 7% against the backdrop of plummeting imports and exports, 45 months of falling producer prices and bad loans reaching 20%), by the western media’s insistence on copying these numbers, and by everyone’s fear of the economic and financial consequences of the ‘Great Fall of China‘.

2015 was also the year when deflation, closely linked -but by no means limited- to China, got a firm hold on the global economy. Denial and fear have restricted our understanding of this development just as much.

And while it should be obvious that 2015 was the year of refugees as well, that topic too has been twisted and turned until full public comprehension has become impossible. Both in the US and in Europe politicians pose for their voters loudly proclaiming that borders must be closed and refugees and migrants sent back to the places they’re fleeing due to our very own military interventions.

And that said politicians have the power to make that happen, the power to close borders to hundreds of thousands of fellow human beings arriving on their countries’ doorsteps. As if thousands of years of human mass migrations never occurred, and have no lessons to teach the present or the future.

The price of oil was a big story, and China plays the lead role in that story, even if again poorly understood. All the reports and opinions about OPEC plans and ‘tactics’ to squeeze US frackers are hollow, since neither OPEC as a whole nor its separate members have the luxury anymore to engage in tactical games; they’re all too squeezed by the demise of Chinese demand growth, if not demand, period.

Ever since 2008, the entire world economy has been kept afloat by the $25 trillion or so that China printed to build overleveraged overcapacity. And now that is gone, never to return. There is nowhere else left for our economies to turn for growth. Everyone counted on China to take them down the yellow brick road to la-la-land, forever. And then it didn’t happen.

What 2015 should have made clear, and did in a way but not nearly clear enough, is that the world economy is falling apart due to a Ponzi bubble of over-production, over-capacity, over-investment, over-borrowing, all of which was grossly overleveraged. And that this now is, for lack of a better word, over.

Most people who read this will have noticed the troubled waters investment funds -hedge funds, mutual funds, money market funds et al- have recently landed in. But perhaps not many understand what this means, and where it may lead. These things tend to be seen as incidents, as is anything that diverts attention away from the ‘recovery just around the corner’ narrative.

Not only do the losses and redemptions at investment funds drive these funds to the brink, everything they’ve invested in also tumbles. Add to this the fact that most of the investments are highly leveraged, which means that typically a loss of just a few percent can wipe out all of the principal, and a notion of the risks becomes clear.

Of course, since many of the funds hold the same or similar investments, we can add yet another risk factor: contagion. Things will blow up first where the risk is highest. Then everything else becomes riskier. Low interest rates have caused many parties to chase high yields -junk bonds-, and that’s where risks are highest.

This is the 2015 story of investment funds, and it will continue, and aggravate, in 2016. Ultra low interest rates drive economies into deflation and investors into ever riskier assets. This is a process of unavoidable deterioration, unstoppable until it has played out in full. A 0.25% rate hike won’t do anything to change that.

Why do interest rate hikes pose such a problem? Because ZIRP has invited if not beckoned everyone to be up to their necks in debt. The entire economy is being kept lopsidedly upright, Wile. E style, by debt. Asset prices, even as commodities have now begun to fall in serious fashion, still look sort of OK, but only until you start to look at the amount of leverage that’s pinning it all up.

Once you see that, you understand how fragile it all is. Go one step further, and it becomes clear that this exponentially growing ‘machinery‘ can only be ‘sustained’ by ever more debt and leverage. Until it no longer can.

Commodities prices have nowhere to go but down for a long time to come. These prices have been propped up by the illusionary expectations for Chinese growth and demand, and now that growth is gone. So, too, then, must the over-leveraged over-investments both in China and abroad.

Growth that was expected to be in double digits for years to come has shrunk to levels well below that ‘official’ 7%. China’s switch to a consumer driven economy is as much a fantasy as the western switch to a knowledge economy has proved to be. If you don’t actually produce things, you’re done. And producing for export markets is futile when there’s no-one left to spend in those markets.

Ergo, commodities, raw materials, the very building blocks of our economies, from oil all the way to steel, are caught in a fire sale. Everything must go! Eventually, commodities prices will more or less stabilize, but at much lower levels than they -still- are at present. That we will need to figure this out in 2016 instead of 2015 is our own fault. We could have been healing, but we’ve yet to face the pain.

Trying to guesstimate how low oil will go is a way of looking at things that seems very outdated. It’s interesting just about exclusively for people who ‘invest’ in the markets, but the reality is that the Fed, BoJ, PBoC and ECB have first made sure through QE and ZIRP/NIRP that there no longer are functioning markets, and they are now losing their relevance because of these very ‘policies’.

Price discovery has already started (oil, commodities), and central banks have benched themselves. They could only re-enter the game if they quit interfering in the markets, but they’re too afraid, all of them, of the consequences that might have, not even so much for their economies but for their TBTF banks.

Yellen’s rate hike will mean some extra profits for those same banks at the cost of the rest of the financial world, but with growth gone to not return for a very long time, and with deflation hitting everything in sight and then some, there is no pretty picture left.

And none of this is really hard to process or understand. It’s just that there’s these concerted efforts to keep you from understanding, that keep you believing in some miracle salvation effort. Which would, so goes the narrative, have to come from the same central banks and the same Wall Street banks that put everyone and their pet guinea pig as deep in debt as they are.

If you have been reading the Automatic Earth over the past 8 years and change, you know what this is about. There are a few, but unfortunately only a few, other sources that may have put you on the same trail.

I was impressed with the following earlier this month from David Stockman, Reagan’s Director of the Office of Management and Budget, who now seems to have firmly caught up with the deflation theme Nicole Foss and I have been warning about ever since we started writing – pre-TAE – at the Oil Drum 10 years ago. Stockman today says that we are entering an epic deflation and the world economy is actually going to shrink for the first time since the 1930s. (!)

The End Of The Bubble Finance Era

There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. [..] .. there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

It’s good to see people finally acknowledging this. It’s still rare. But there’s another, again interlinked, development that is very poorly understood. Which is that in a debt deflation, the ‘money’ that appears to be real and present in leveraged investments more often than not doesn’t get pulled out of one ‘investment’ only to be put into another, it just goes POOF, it vanishes.

And though it may seem strange, conventional economics has a very hard time with that. In the eyes of that field, if you don’t spend your money, you must be saving it. The possibility of losing it altogether is not a viable option. Or, if you lose it, someone else must be gaining it, zero-sum style.

But that view ignores the entire ‘pyramid’ of leveraged loans and investments and commodity prices, which precisely because that pyramid contained no more than a few percentage points of ‘real collateral’ to underpin everything it kept afloat, should have been a red flag. Because this is the very essence of debt deflation.

Just one little example of how and why this happens comes from this Bloomberg item. The key word is ‘evaporates’:

$100 Billion Evaporates as World’s Worst Oil Major Plunges 90%

Colombia is nursing paper losses of more than $100 billion after its oil boom fell short of expectations, wiping out 90% of the value of what was once Latin America’s biggest company. From being the world’s fifth-most valuable oil producer at its zenith in 2012, worth more than BP, state-controlled Ecopetrol now ranks 38th. Its market capitalization has fallen to $14.5 billion, down from its peak of $136.7 billion. “They just haven’t found oil, it’s as simple as that,” Rupert Stebbings at Bancolombia said from Medellin. “The whole oil sector got massively over-bought, and people assumed that one day they’d hit an absolute gusher.”

2016 will be the year when a lot of ‘underlying wealth’ evaporates. Trillions of dollars already have in the commodities markets, but, again, our media don’t tell us about it, or at least they frame it in different terms. They use deflation to mean falling consumer prices, but then insist on calling falling prices at the pump a positive thing. Without recognizing to what extent those falling prices eat away at the entire economy, and at society at large.

To summarize for now: we have elected to deny and ignore what has happened to our economies, our societies and our lives in 2015, only to be forced to face all of it in 2016. That makes the year an easy one to predict. But there are of course a lot of other possible spokes and wheels and other things.

Any government that sees its nation slide down into a deep enough pit will always consider going to war. One or more central banks may opt for a Hail Mary helicopter ride. A volcano may erupt. But none of these things will prevent the bubbles we have blown from deflating. They may divert attention, they may delay the inevitable a bit more, sure. But bubbles never last.

I have a whole list of key words I wanted to use in this, but I think I’ll turn them into a separate article. The main point is you understand the gist of it all. There are no markets, and what has posed as markets is crumbling before our very eyes, inexorably. The best we can do is say ‘see you on the other side’, if we’re lucky.

Debt Rattle December 21 2015

Dec 212015
 
 December 21, 2015  Posted by at 10:27 am Finance Tagged with: , , , , , , ,  Comments Off on Debt Rattle December 21 2015


Lewis Wickes Hine Child Labor in Magnolia Cotton Mills spinning room, Mississippi 1911

• Brent Oil Slides to 11-Year Low as Producers Seen Worsening Glut (BBG)
• Siberian Surprise: Russian Oil Patch Just Keeps Pumping (BBG)
• This So-Called Rate Hike Is Completely Jerry-Rigged (E&M)
• Central Banks Created A Monster That Drives The Economy On The Way Down (King)
• Europe’s Year From Hell May Presage Worse To Come (Reuters)
• Spain Election Confusion: Conservatives Win But Podemos Are Stars (Ind.)
• Alexis Tsipras Pushes For IMF To Stay Out Of Next Greek Bailout (FT)
• After Jumping Over One Hurdle, Greece Faces Another With Pensions (CNBC)
• UK Buyers Need To Save For Up To 24 Years To Get On Property Ladder (Guardian)
• Canada’s Trudeau Cites Risk in Curbing Foreign Real-Estate Investment (WSJ)
• Kansas Suspends Debt Limits To Pay For Tax Cuts (Wichita Eagle)
• The Empire Files: ‘America’s Ship is Sinking’: Former Bush Official (TeleSur)
• The West Dominates Global Arms Sales (Forbes)
• The Refugee Crisis Is Forcing Germans To Ask: Who Are We? (Guardian)
• Vice Chancellor: Austria Can’t Accept Over 100,000 Migrants A Year (Reuters)
• My Baby, The Refugee: Mothers On The Hardest Journey Of Their Lives (Guardian)
• 18 Migrants Drown After Boat Sinks Off Turkey’s Southwestern Coast (Reuters)

China demand tanks. For oil, for everything. If there is to be a ‘Story of 2015’, it should be that. But instead, denial pushes it forward to 2016.

• Brent Oil Slides to 11-Year Low as Producers Seen Worsening Glut (BBG)

Brent crude slumped to the lowest level since 2004 amid speculation suppliers from the Middle East to the U.S. will exacerbate a record glut as they continue fighting for market share. Futures fell as much as 1.9% in London after a 2.8% drop last week. Producers are focusing on reducing costs amid the price decline, Qatar Energy Minister Mohammed Al Sada said Sunday at a meeting of Arab oil-exporting nations in Cairo. Drillers in the U.S. put the most rigs back to work since July, adding 17, data from Baker Hughes showed. Oil has fallen below levels last seen during the 2008 global financial crisis on signs the market’s oversupply will worsen. OPEC effectively abandoned output limits at a Dec. 4 meeting, while the U.S. on Friday passed legislation that lifted a 40-year ban on crude exports.

“There hasn’t been any significant signs of a pick-up in demand and we haven’t seen any meaningful cuts to production,” Ric Spooner, a chief analyst at CMC Markets in Sydney, said by phone. “Nothing has really changed in the oil market over the past couple of months apart from the price.” Brent for February settlement slid as much as 71 cents to $36.17 a barrel on the London-based ICE Futures Europe exchange, the lowest level in intraday trade since July 13, 2004. The contract was at $36.41 at 2:21 p.m. Singapore time after falling 18 cents to $36.88 on Friday, the lowest close since December 2008. Front-month prices are down 36% this year, set for a third annual loss. West Texas Intermediate for January delivery, which expires Monday, was 28 cents lower at $34.45 a barrel on the New York Mercantile Exchange. It dropped 22 cents to $34.73 on Friday, the lowest close since February 2009. The more active February contract was down 29 cents at $35.77. Total volume was close to the 100-day average.

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Nobody has a choice.

• Siberian Surprise: Russian Oil Patch Just Keeps Pumping (BBG)

In the fight for market share among the world’s oil producers this year, Russia wasn’t supposed to be a contender. But the world’s No. 3 producer has been pumping at the fastest pace since the collapse of the Soviet Union, adding to the flood on an already-swamped market and helping push prices to the lowest levels since 2009. Russia’s unexpected oil bounty this year is the result not of a new Kremlin campaign but of dozens of modest productivity improvements across the sprawling sector. Even pressured by plunging prices, as well as U.S. and European Union sanctions that cut access to much foreign financing and technology, Russian companies have managed to squeeze more crude out of some of the country’s oldest fields.

They have also brought new projects on line, offsetting steady declines in its core producing region of West Siberia. With a rise of 0.5% in the first nine months of 2015, Russia hasn’t boosted production as much as its larger rivals, the U.S. (up 1.3%) and Saudi Arabia (up 5.8%), according to Citigroup Inc. But having ignored OPEC’s calls earlier this year to join efforts to support prices by pumping less, Russia is keeping up with the cartel. “I know of no one who had predicted that Russian production would rise in 2015, let alone to new record levels,” said Edward Morse, Citigroup’s global head of commodities research. As recently as April, not even the Russian government thought 2015 would break the record.

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It’s about the banks.

• This So-Called Rate Hike Is Completely Jerry-Rigged (E&M)

It’s official. [Last] week the Federal Reserve raised the key overnight Fed Funds rate by 0.25%. The move was discussed, debated, argued, and telegraphed to death. We all heard about it until we hoped anything else financial would happen so we could finally put the tired story to rest. Now that the rate hike is on the books, we can start talking about outcomes, like how in the world the Fed intends to enforce the rate hike, what it means, and what comes next. The first one is not so simple, the second is annoying, and the third is downright depressing. But we’d better start planning for this today, because it will definitely affect our investments in the months to come! This rate hike is unlike any other. It comes on the heels of several quantitative easing programs that have dumped trillions of new dollars into the banking system.

Before the financial crisis, banks held about $60 billion of excess reserves at the Fed. These are funds above and beyond their required reserves. Today, excess reserves total about $2.6 trillion, which represents part of the money the Fed printed and then used to buy bonds. Typically this cash would have flowed into the economy through lending, but in 2008 the Fed started paying interest on excess reserves, which has kept the funds out of circulation. With so much extra cash in their accounts, banks have almost no need to borrow from each other. This creates a problem for the Fed because adjusting the rate at which banks lend to each other, called the Fed Funds rate, is how it historically enforced its interest rate policy. Starting this week, the Fed will have to use new, largely untested tools.

Since there is almost zero demand for money between banks, the Fed is increasing the interest it pays on excess reserves from 0.25% to 0.50%. At the same time, the Fed intends to lend out up to $2 trillion of its own stash of bonds in the overnight repurchase market. It will lend these to banks, money market funds, and other institutions for one night, with an agreement to buy the bonds back the next day at a slightly higher price, effectively paying the counterparty 0.25% interest. It’s more than a little backwards. The upshot is that instead of banks paying each other the higher rate of interest after a rate hike, now it’s the Fed, which means it’s really me and you, since the Fed gets money by taking value from the rest of us. At the new, higher rate, this is about $10.5 billion per year that is nothing but a gift to banks.

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“It depends less on fundamentals, and more on second-guessing what everyone else will do.”

• Central Banks Created A Monster That Drives The Economy On The Way Down (King)

The broader narrative – in which central bank liquidity has pushed up asset prices without fostering a similar improvement in the underlying economy – is one we find the vast majority of [fixed income] investors are sympathetic to. The only question is on the timing: no one wants to get out too early. This is one of the reasons we find the outlook for next year so difficult, and why there is so little agreement about it (even internally at Citi, never mind across the street). It depends less on fundamentals, and more on second-guessing what everyone else will do. Of course, markets are always to some extent like that, but self-reinforcing processes seem to have grown in importance in recent years. Rather than the economy driving markets, as is supposed to be the case, the risk is that central banks have now created a monster such that markets drive the economy, if not on the way up, then certainly on the way down.

Suppose, for example, that all does not go according to plan, and that the current squeeze higher in markets fades and even reverses. Perhaps oil price and EM weakness prove persistent, markets and the developed economies continue to prove more susceptible to these than they “ought” to, inflation breakevens fall, spreads widen and equities suffer even in the face of continuing share buybacks and record M&A. The scenario is far from unthinkable: indeed, it would simply be a continuation of everything we’ve seen in the past six months. What we find really alarming in such a scenario is not only that the safety net might be a while in coming, but that we are increasingly doubtful of how much support it would provide, at least initially.

Clearly the threshold for the Fed to reverse its hike, let alone do more QE or move to negative rates, is very high. And while the ECB should eventually do more, the bar to Draghi being able to spur the rest of the Governing Council to arms would now seem to have been raised. Worse, though, the broad market reaction to central bank stimulus seems to be waning. In credit, and in Europe, this is not too bad. We do still think negative rates and QE retain a positive effect, even if it seems to be driving almost as much money into US fixed income as into European credit and equities.

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Brussels is a crisis-producing machine.

• Europe’s Year From Hell May Presage Worse To Come (Reuters)

By any measure, it has been a year from hell for the European Union. And if Britons vote to leave the bloc, next year could be worse. Not since 1989, the year the Berlin Wall fell and communism crumbled across eastern Europe, has the continent’s geopolitical kaleidescope been shaken up so vigorously. But unlike that year of joyous turmoil, which paved the way for a leap forward in European integration, the crises of 2015 have threatened to tear the Union apart and left it battered, bruised, despondent and littered with new barriers. The collapse of the Iron Curtain led within two years to the agreement to create a single European currency and, over the following 15 years, to the eastward enlargement of the EU and NATO up to the borders of Russia, Ukraine and Belarus.

That appeared to confirm founding father Jean Monnet’s prediction that a united Europe would be built out of crises. In contrast, this year’s political and economic shocks over an influx of migrants, Greek debt, Islamist violence and Russian military action have led to the return of border controls in many places, the rise of populist anti-EU political forces and recrimination among EU governments. Jean-Claude Juncker, who describes his EU executive as the “last chance Commission,” warned that the EU’s open-border Schengen area of passport-free travel was in danger and the euro itself would be unlikely to survive if internal borders were shut. Juncker resorted to gallows humor after the last of 12 EU summits this year, most devoted to last-gasp crisis management: “The crises that are with us will remain and others will come.”

His gloomy tone was a reality check on the “we can do it” spirit that German Chancellor Angela Merkel – Europe’s pre-eminent leader – has sought to apply to the absorption of hundreds of thousands of mostly Syrian refugees. Merkel has received little support from her EU partners in sharing the migrant burden. Most have insisted the priority is sealing Europe’s external borders rather than welcoming more than a token number of refugees in their own countries. This is partly due to latent resentment of German dominance of the EU and payback for its reluctance to share more financial risks in the eurozone. Some partners also accuse Berlin of hypocrisy over its energy ties with Russia, while friends such as France, the Netherlands and Denmark are simply petrified by the rise of right-wing anti-immigration populists at home.

One of the sharpest rebuffs to sharing more of the refugee burden came from close ally Paris. Prime Minister Manuel Valls said of Merkel’s open door policy towards Syrian refugees: “It was not France that said ‘Come!’.” Merkel’s critics rounded on her at an end-of-year EU summit. Italy’s Matteo Renzi, backed by Portugal and Greece, attacked her refusal to accept a eurozone bank deposit guarantee scheme. The Baltic states, Bulgaria and Italy denounced her support for a direct gas pipeline from Russia to Germany at a time when the EU is sanctioning Moscow over its military action in Ukraine and has forced the cancellation of a pipeline to southern Europe. “It was pretty much everyone against Merkel in the room,” a diplomat who heard the exchanges said.

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Left wing coalition?

• Spain Election Confusion: Conservatives Win But Podemos Are Stars (Ind.)

Spain was plunged into the political unknown on Sunday night as no single party emerged as the winner in its closest general election since the end of the Franco dictatorship 40 years ago. The governing Popular Party (PP), led by the Prime Minister, Mariano Rajoy, secured 28.7% of the vote. That put the party in first place, but well below what it needs to maintain its majority. Mr Rajoy will now be given the first opportunity to persuade rival parties to join him in government before parliament reconvenes next month. But the night belonged to Podemos, and its leader, the ponytailed Pablo Iglesias. The left-wing party, which did not even exist two years ago, finished third with 20.6%. The mainstream left-wing opposition, the PSOE, just beat Podemos into second place with 22%.

For four decades the PP and the PSOE have dominated Spanish politics, swapping power at regular intervals. Their combined grip on office is now almost certainly at an end. The 60-year-old Mr Rajoy, who lost two elections before his landslide four years ago, now faces a fight for his political career. Throughout the campaign, commentators have suggested that the PP – always the favourite to emerge as the strongest single party – could overcome a hung parliament by striking a deal with the new centrist party Ciudadanos, which collected 15.2% of the vote. Crucially for Mr Rajoy, however, the election arithmetic – even with Ciudadanos – appears to work against him. Although he only needs a simple majority to be confirmed as prime minister when the Spanish parliament reconvenes on 13 January, he will need at least 176 seats to carry through his programme. According to the exit poll, which surveyed 180,000 people, a combination of the PP and Ciudadanos will not reach that magic number.

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Tsipras should pull the plug on the entire circus.

• Alexis Tsipras Pushes For IMF To Stay Out Of Next Greek Bailout (FT)

Greek prime minister Alexis Tsipras is pushing for the IMF to stay out of the country’s €86 billion third bailout, leaving the euro zone to take full responsibility for overseeing economic reforms. Mr Tsipras said in an interview with the Financial Times he was “puzzled by the unconstructive attitude of the fund on fiscal and financial issues”. He indicated that the IMF should leave his country’s third bailout to the euro zone when it decides whether to stay involved early next year. “We think that after six years of managing in extraordinary crisis, Europe now has the institutional capacity to deal successfully with intra-European issues.” Mr Tsipras’s assertion is likely to anger the German government, which has always insisted the IMF stay on board. Berlin values the fund’s technical expertise as much as it doubts the European Commission’s resolve.

Mr Tsipras also risks alienating the IMF, which is a strong advocate of debt relief for Athens while Germany and other euro zone members are strongly against debt writedowns, although he praised the fund’s support on this issue. Mr Tsipras said his government wanted to implement bailout measures as swiftly as possible with the aim of recovering sovereignty and getting rid of the so-called “troika” of bailout monitors from the commission, IMF and ECB. “We believe the sooner we get away from the [bailout] program the better for our country,” he said. “If Greece completes the first [progress] review in January, we’ll be covering more than 70% of fiscal and financial measures in the agreement.” Mr Tsipras also sounded confident that Greece would lift all remaining capital controls by March and resume borrowing on international capital markets “before the end of 2016”.

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Greece saw 12 seperate pension cuts so far.

• After Jumping Over One Hurdle, Greece Faces Another With Pensions (CNBC)

Don’t look now, but 2016 may bring a host of new troubles for Greece, which just last week barely overcame a dispute with its international creditors. Struggling to meet the demands of its bailout terms, the Hellenic Republic was forced on Thursday to scrap an effort to alleviate the burden of its austerity program on poorer Greeks. The demise of its so-called “parallel program”, although a short-term defeat for Prime Minister Alexis Tsipras, triggered the release of €1 billion in new bailout funding, expected to be disbursed as early as Monday. The money was part of an agreement that was sealed last summer.

Now, momentum shifts to pension reform, which is expected as soon as next month. The battle will take shape just as the Greek government appears to have won a hard-fought consensus with creditors on other outstanding issues such as deregulation and the establishment of a privatization fund – which must gather €50 billion by 2030. A pension system overhaul, however, is shaping up to be a big hurdle for Greece, a hard sell at a time when the country’s economic crises have sent unemployment skyrocketing above 25% and average income plummeting 25% over the last four years. “Both the government’s willingness to reform and its internal cohesion appear to be weak which does not bode well for the prospects of reform,” said Stathis Kalyvas, a professor of political science at Yale University and the co-director of its Hellenic Studies program.

“On the flip side, there is no real alternative for the government right now and the fact that it has already embarked on reform process following last summer’s agreement will be pushing it to implement it sooner rather than later”. Greece challenge is to convince its creditors that it can reduce government expenditure by up to 1% of its economy via pension cuts. But in a country where the social costs of austerity weighs on the mood of the general population, some think new pension adjustments could be the straw that breaks the camel’s back. Some of the government’s 153 MPs have already made clear that they will not support new cuts to pensions. If as few as three MPs vote against pension reform, analysts say it is likely the government will lose its majority, once again sinking back into political crisis.

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Prime candidate for dumbest term ever invented: housing ladder or property ladder. The UK, like Canada, Oz and New Zealand, is busy blowing up its own housing market, and refusing to halt it.

• UK Buyers Need To Save For Up To 24 Years To Get On Property Ladder (Guardian)

Homebuyers now have to save for up to 24 years to set aside a deposit large enough to buy them a foot on Britain’s housing ladder, according to new research. The Resolution Foundation thinktank has used the Bank of England’s latest survey of household finances to show that with house prices rising sharply, it would now take almost a quarter of a century for low- and middle-income households to accumulate a deposit on average, if they set aside 5% of their disposable income each year. It is lower than the peak reached before the financial crisis, but dramatically higher than the three years that was the norm in the 1980s and 1990s – and comes despite interest rates remaining at the emergency level of 0.5% set by the Bank of England in the depths of recession.

George Osborne has introduced a series of help-to-buy policies, including shared ownership schemes and taxpayer guarantees for mortgages for first-time buyers, and pledged in his spending review last month to “turn generation rent into generation buy”. But Resolution’s chief economist, Matt Whittaker, warned that help to buy may simply boost house prices, lifting them further out of the reach of lower-income households. “To the extent that these schemes have stoked demand and so propped up house prices in recent years, they have served to make homeownership even less attainable for many, while increasing the gains flowing to older homeowners who have been the main beneficiaries of the sustained housing boom,” he said.

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It’s an Anglo disease. Trudeau’s too scared to rock the boat, just like the others.

• Canada’s Trudeau Cites Risk in Curbing Foreign Real-Estate Investment (WSJ)

Imposing curbs on foreign investment in Canadian real estate could have unintended consequences for the broader economy, Canadian Prime Minister Justin Trudeau warned in a year-end interview with Canada’s Global Television Network, scheduled to air Christmas Day. Mr. Trudeau said there is a lack of “concrete data” about the impact of foreign buying on Canadian real estate, so moving ahead without proper information is risky. Mr. Trudeau’s comments emerge as a debate heats up over the impact overseas buyers may be having on housing affordability in the two of the country’s biggest housing markets—Toronto and Vancouver, British Columbia.

“You know you have to be cautious about decisions like that that are based on a single factor because at the same time [it] would potentially devalue the equity that a lot of people have in their homes right now,” Mr. Trudeau said, according to a transcript of the interview distributed by Global TV. “We have to be very, very cautious about restricting foreign investment in our country at a time where we know we need foreign investment in businesses, in resource development.”

Economists indicate strong sales and price growth in Toronto and Vancouver are supported by job creation in the two metropolitan areas, and an increasing number of people migrating to those urban centers as resource-rich parts of the country suffer under the weight of low commodity prices, as opposed to foreign investment. Meantime, Evan Siddall, the president of Canada Mortgage and Housing Corp., a government-owned mortgage insurer and housing agency, said in a recent speech that foreign investment could be contributing to the overvaluation of housing prices in the two markets. But, he said, the country lacks “accurate and reliable data” to determine the role foreign investment has on housing prices in the country.

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Almost funny.

• Kansas Suspends Debt Limits To Pay For Tax Cuts (Wichita Eagle)

Right-wing Republican lawmakers have operated under the radar to suspend all statutory limits on highway debt, and that unprecedented authority was recently used to issue record-breaking levels of long-term debt to pay for their reckless income tax cuts this year and next. Six lines buried deep in a 700-page appropriation bill last spring gave the Kansas Department of Transportation unlimited authority to issue debt, and in early December, without public disclosure, the agency used that authority to issue $400 million in highway bonds. State law requires those debt proceeds to be used for improving state highways, but do not expect that to happen. Lawmakers directed that $400 million and more be swept from the highway fund to help pay for the $700 million dip in state revenues caused by income tax cuts in 2012 and 2013.

The $400 million in new highway debt represents the largest single highway bond in state history and bumps up total outstanding highway debt to $2.1 billion, also a state record. The size of the bond issue was boosted 60% higher than planned last January in order to stabilize at least temporarily the precarious condition of state finances. Never before in state history has a state agency been granted unlimited powers to issue debt. Prior to this extraordinary action, state lawmakers had carefully placed specific limits on the state’s ability to borrow money. KDOT’s authority to issue unlimited debt continues through this fiscal year and next, so additional highway bonds could be issued at any time over the next 18 months. The governor and legislative leaders went to extraordinary lengths to hide their suspension of debt limits from public scrutiny.

The governor’s budget report made no mention of the suspension. Republicans who controlled the appropriations conference committee never raised the issue. The Statehouse press corps missed it as well. Further, neither the governor nor KDOT disclosed to the public that KDOT had issued $400 million in new, record-breaking debt. Only after press inquiries last week, two weeks after the fact, did KDOT acknowledge that new bonds had been issued.Gov. Sam Brownback and Republican legislative leaders have elevated the practice of confiscating highway funds to pay for other state obligations to a new level. In this year alone $436 million will be swept from the highway fund – the single largest transfer ever. That amount plus prior transfers during Brownback’s term brings their displacement of highway funds to a breathtaking total of $1.6 billion.

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How empires fall: overreach.

• The Empire Files: ‘America’s Ship is Sinking’: Former Bush Official (TeleSur)

“This ship is sinking,” retired U.S. Army Colonel Lawrence Wilkerson tells Abby Martin, adding that “today the purpose of US foreign policy is to support the complex that we have created in the national security state that is fueled, funded, and powered by interminable war.” The former national security advisor to the Reagan administration, who spent years as an assistant to Secretary of State Colin Powell during both Bush administrations reflects on the sad but honest reflection on what America has become as he exposes the unfixable corruption inside the establishment and the corporate interests driving foreign policy. “It’s never been about altruism, it’s about sheer power.”

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This does not include what’s sold domestically.

• The West Dominates Global Arms Sales (Forbes)

In 2014, sales of the world’s top-100 arms manufacturers totalled $401 billion, according to a report from the the Stockholm International Peace Research Institute. There was a moderate 1.5% decline in sales between 2013 and 2014, primarily due to lower sales for companies based in North America and Western Europe. Despite that decline, the West still dominates global arms sales. In 2014, seven out of the top ten largest arms-producing companies were American. Lockheed Martin grabbed the top spot for the first time since 2009, acccording to SIPRI, with arms sales totaling $37.5 billion. Boeing was in second place with $28.3 billion while Britain’s BAE Systems came third with just under $26 billion in sales.

Last year, the United States accounted for 54.4% of the world’s arms sales. The United Kingdom was in second place, with 10.4% while Russian companies had a 10.2% share of the market. Arms sales by Western European countries fell 7.4% in 2014 with only German and Swiss companies showing growth (9.4 and 11.2% respectively). Increasing national military expenditure and exports in Russia have seen the country’s arms industry grow steadily. According to SIPRI, Russia’s top eleven military companies experienced revenue growth of 48.4% between 2013 and 2014.

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“Are other countries’ wars our responsibility? That’s a question you hear a lot these days. But no one wants to hear the answer.”

• The Refugee Crisis Is Forcing Germans To Ask: Who Are We? (Guardian)

I recently read that criminality is on the rise in German towns that have accepted refugees. But it’s not the refugees who are responsible for this crime wave: Germans in these towns have been committing arson, damaging property and attacking refugees. In other words, Germans have been making their own worst fears come true. Often the fear of loss leads to the very loss we fear – a principle that holds true not only for jealous lovers but also, it seems, for those who turn to violence out of fear that the refugees will cost them their safety and peace. The refugees haven’t even all been registered yet, but already they raise questions about who we are. Some Germans can imagine what it means to lose everything – hence their empathy; some can imagine what it means to lose everything – hence their fear.

We no longer have a universal frame of reference. Angela Merkel’s declaration that refugees are fundamentally deserving of protection – hers was the only declaration of its kind in Europe – has two main sticking points in her own country. First, there’s the free-market logic according to which the German government will prohibit neither the export of weapons by German companies to warring nations nor the ruthless exploitation of resources under corrupt systems in Africa, Asia and eastern Europe. And then there’s the ever-growing violence, both verbal and physical, from part of the German population: those who would like to see their country walled off with barbed wire – as is happening in Hungary – or, failing that, to at least have the Berlin government refuse to accept even the ridiculously low numbers of refugees mandated by the European Union – as Poland and the UK have done.

But which “European values” are best upheld with barbed wire and fences, regulations, harassment and attacks? Liberté, égalité, fraternité? Or is this mainly about our own survival? In eastern Germany, you can once again hear people chanting Wir sind das Volk (“We are the people”). In 1989 that sentence opened a border; now it’s being used to close a border, to insulate this finally unified Volk from the newcomers, who lack any unity since they are fleeing so many different wars. Are other countries’ wars our responsibility? That’s a question you hear a lot these days. But no one wants to hear the answer.

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Lest we forget: one prediction is for 3 million refugees in 2016. Even ‘just’ half that will lead to complete mayhem.

• Vice Chancellor: Austria Can’t Accept Over 100,000 Migrants A Year (Reuters)

Austria’s Vice Chancellor said on Monday that Austria could not accept more than 100,000 migrants a year, following a pledge from its larger neighbor Germany to limit arrivals. Hundreds of thousands of people, many of them fleeing conflict and poverty in the Middle East, Afghanistan and elsewhere, have entered Austria on their route northwest from the Balkans since early September. Most have moved on to Germany, but Austria still expects to have received about 95,000 asylum applications this year, equivalent to more than 1% of its population, compared with the 28,000 registered in 2014. Of those, 38% were approved.

“Around 90-100,000 – a lot more will simply not be possible,” Reinhold Mitterlehner, from the conservative OVP, junior partner in the coalition, told ORF radio. Chancellor Werner Faymann, a Social Democrat who has generally adopted a more compassionate tone on the issue than the conservatives, was quoted as saying on Saturday that Austria should step up deportations of migrants who do not qualify for asylum. Faymann has also emphasized that policy decisions have been closely coordinated with his German counterpart Angela Merkel, who has pledged to “noticeably reduce the number of refugees”, fending off a challenge from critics of her own.

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“If I cry in this Jungle, will anyone help me? No. I am in the Jungle, so I have to try and smile.”

• My Baby, The Refugee: Mothers On The Hardest Journey Of Their Lives (Guardian)

In a caravan in Calais, two little girls are playing a game. While their mother’s attention is elsewhere, they hang out of the small gap of an open window, giggling as they see who can lean the farthest. They could be on a family holiday, if it wasn’t for the squalor surrounding them. Instead, the children are living on mud-covered scrubland, without electricity or heating – just two more inhabitants of the unofficial refugee camp on Britain’s doorstep. A few minutes’ drive from the ferry port, the “new Jungle” is a symbol of the UK’s reluctance to deal with the refugee crises on our borders. Here, 200 women and children are said to be living among the 4,000 refugees, crammed into water-logged tents, caravans and even garden sheds. Thousands more live in similar conditions in nearby Dunkirk. While the young men who risk their lives jumping on to trains or lorries crossing the Channel have become the faces of this crisis, hidden in their midst are these families, trapped in an agonising limbo.

Rima, her shy son Adnan, five, and lively three-year-old daughter, Nour, are among them. The family fled Syria two months ago – just in time, Rima says, to avoid the fate of their nextdoor neighbours, who were killed in their homes the week before we speak. The children’s father was imprisoned in 2012, when Nour was two months old. “There is no security in our city,” Rima tells me. “You don’t have to have done anything for them to put you in prison. Every day I begged the guards to release him. They asked me for money, so I sold everything, but it was never enough. Finally, after a year, they told me he was dead. They allowed me to come every day and plead for him when he was dead. They never gave me his body.” Rima and her children joined the stream of refugees on what has become known as the “ant road”, from Turkey to western Europe.

“Walking through the night was terrifying,” Rima says. “I had a bag on my back and I put my daughter in it. She was ill; she had a temperature of 41C. The most frightening point was when a man on a motorbike wanted to carry my little boy – he said he’d take only the boy, not the girl. I thought he might snatch him.” Like many of the mothers here, Rima’s fear of imminent danger has been replaced with anxieties about the filthy, cold and sometimes violent conditions of the camp. As it becomes more permanent, little shops, cafes and even nightclubs have sprung up, giving a cruel imitation of a music festival – until the riot police come into view, standing guard near the motorway bridge. Despite being just yards from pleasant French houses, and a short drive from Calais’s squares and restaurants, the Jungle residents rely on candles for light and open fires for warmth.

Small fires that rip through caravans and tents are now a regular occurrence. In heavy rain, the area floods. At night, when the police clash with refugees, tear gas fills the air. The noise and insecurity are taking their toll on the already exhausted, traumatised children. “Now, there are no bombs, but we are freezing and still afraid,” Rima says, adding that she developed a heart condition after her husband was imprisoned. “There is no heating and we are living in the mud. In the night, my daughter screams in her sleep and hits out, because she has bad dreams. Four days ago, my heart felt so bad that I thought I would die. If I am not here, who will look after my children?”

Around 400 luckier women and children have found a space in the state-run Jules Ferry Centre, which also provides a hot meal every day for up to 2,500 Jungle residents who live outside, and a hot shower for around 1,000. Dedicated British and French donors and charities have also stepped in, offering warm clothes and nappies, and opening a women and children’s centre with a playground. But their goodwill alone cannot provide lights, heating or somewhere private to wash. For the mothers trapped here, all that is left is to put on a brave face and hope for a better life. Communities have sprung up; neighbours look after each other’s children and try to offer support. Despite their trying circumstances, people greet each other warmly. As one woman tells me, with heart-breaking honesty, “If I cry in this Jungle, will anyone help me? No. I am in the Jungle, so I have to try and smile.”

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Just another day in the Aegean.

• 18 Migrants Drown After Boat Sinks Off Turkey’s Southwestern Coast (Reuters)

Eighteen people died and 14 were rescued late on Friday after a boat carrying migrants trying to sail to Greece sank off the southern Turkish town of Bodrum, Dogan News Agency reported. Fishermen hearing the migrants’ screams of migrants alerted the Turkish coast guard, who picked up the bodies from the sea after the wooden boat carrying migrants from Iraq, Pakistan and Syria capsized about 3.5 km off the coast. Those rescued were taken to the hospital in Bodrum, many in serious condition, the agency said. The coast guard was not immediately available for comment.

A record 500,000 refugees from the four-year-old civil war in Syria have traveled through Turkey then risked their lives at sea to reach Greek islands this year, their first stop in the EU before continuing to wealthier countries. Despite the winter conditions and rougher seas, the exodus has continued, albeit at a slower pace. Nearly 600 people have died this year on the so-called eastern Mediterranean sea route for migrants, according to the International Organization for Migration. Turkey struck a deal with the EU on Nov. 29 pledging to help stem the flow of migrants into Europe in return for €3 billion of cash for the 2.2 million Syrians Ankara has been hosting, visas and renewed talks on joining the 28-nation bloc.

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Debt Rattle October 11 2015

Oct 112015
 
 October 11, 2015  Posted by at 9:53 am Finance Tagged with: , , , , , , , , , ,  4 Responses »


Marjory Collins Window of Jewish religious shop on Broome Street, New York Aug 1942

• The World Economic Order Is Collapsing And There Seems No Way Out (Observer)
• Central Bank Cavalry Can No Longer Save The World (Reuters)
• Quantitative Frightening (Economist)
• Beijing’s Market Rescue Leaves China Stocks Stuck in the Doldrums (WSJ)
• Fed Officials Seem Ready To Deploy Negative Rates In Next Crisis (MarketWatch)
• IMF: Keep Interest Rates Low Or Risk Another Crash (Guardian)
• Last Time This Ratio Soared Like This Was After Lehman Moment (WolfStreet)
• Why We Shouldn’t Borrow Money From The Future (John Kay)
• Euro Superstate Won’t Save Dysfunctional Single Currency: Ex-IMF Chief (Telegraph)
• The Real Fight To Win The International Currency Wars (Telegraph)
• When Pension Funds Go Empty, All Bets Are Off (NY Post)
• US Probes Second VW Emissions Control Device It Has Failed To Disclose (BBG)
• Germany Readies For More Woe As Scandal And Slowdown Hit Economy (Observer)
• Ex-CEO Of Anglo Irish Bank In US Custody Facing Extradition (Guardian)
• China’s Monetary-Policy Choice (Zhang Jun)
• Hundreds Of Thousands Protest EU-US TTiP Trade Deal in Berlin (Reuters)
• Tepco Expects To Begin Freezing Ice Wall At Fukushima No. 1 By Year-End (BBG)
• UK Home Office Bans ‘Luxury’ Goods For Syrian Refugees (Observer)
• World Will Pass Crucial 2ºC Global Warming Limit (Observer)

“..the hundreds of billions of dollars fleeing emerging economies, from Brazil to China, don’t come with images of women and children on capsizing boats. Nor do banks that have lent trillions that will never be repaid post gruesome videos. ”

• The World Economic Order Is Collapsing And There Seems No Way Out (Observer)

Europe has seen nothing like this for 70 years – the visible expression of a world where order is collapsing. The millions of refugees fleeing from ceaseless Middle Eastern war and barbarism are voting with their feet, despairing of their futures. The catalyst for their despair – the shredding of state structures and grip of Islamic fundamentalism on young Muslim minds – shows no sign of disappearing. Yet there is a parallel collapse in the economic order that is less conspicuous: the hundreds of billions of dollars fleeing emerging economies, from Brazil to China, don’t come with images of women and children on capsizing boats. Nor do banks that have lent trillions that will never be repaid post gruesome videos. However, this collapse threatens our liberal universe as much as certain responses to the refugees.

Capital flight and bank fragility are profound dysfunctions in the way the global economy is now organised that will surface as real-world economic dislocation. The IMF is profoundly concerned, warning at last week’s annual meeting in Peru of $3tn (£1.95tn) of excess credit globally and weakening global economic growth. But while it knows there needs to be an international co-ordinated response, no progress is likely. The grip of libertarian, anti-state philosophies on the dominant Anglo-Saxon political right in the US and UK makes such intervention as probable as a Middle East settlement. Order is crumbling all around and the forces that might save it are politically weak and intellectually ineffective. The heart of the economic disorder is a world financial system that has gone rogue.

Global banks now make profits to a extraordinary degree from doing business with each other. As a result, banking’s power to create money out of nothing has been taken to a whole new level. That banks create credit is nothing new; the system depends on the truth that not all depositors will want their money back simultaneously. So there is a tendency for some of the cash banks lend in one month to be redeposited by borrowers the following month: a part of this cash can be re-lent, again, in a third month – on top of existing lending capacity. Each lending cycle creates more credit, which is why lending has always been carefully regulated by national central banks to ensure loans will, in general, be repaid and sufficient capital reserves are held. .

The emergence of a global banking system means central banks are much less able to monitor and control what is going on. And because few countries now limit capital flows, in part because they want access to potential credit, cash generated out of nothing can be lent in countries where the economic prospects look superficially good. This provokes floods of credit, rather like the movements of refugees.

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Never could. Only thing they could do was to make things much worse. Mission accomplished.

• Central Bank Cavalry Can No Longer Save The World (Reuters)

In 2008 central banks, led by the Federal Reserve, rode to the rescue of the global financial system. Seven years on and trillions of dollars later they no longer have the answers and may even represent a major risk for the global economy. A report by the Group of 30, an international body led by former ECB chief Jean-Claude Trichet, warned on Saturday that zero rates and money printing were not sufficient to revive economic growth and risked becoming semi-permanent measures. “Central banks have described their actions as ‘buying time’ for governments to finally resolve the crisis… But time is wearing on, and (bond) purchases have had their price,” the report said. In the United States, the Fed ended its bond purchase program in 2014, and had been expected to raise interest rates from zero as early as June 2015.

But it may struggle to implement its first hike in almost 10 years by the end of the year. Market pricing in interest rate futures puts a hike in March 2016. The Bank of England has also delayed, while the ECB looks set to implement another round of quantitative easing, as does the Bank of Japan which has been stuck in some form of quantitative easing since 2001. Reuters calculates that central banks in those four countries alone have spent around $7 trillion in bond purchases. The flow of easy money has inflated asset prices like stocks and housing in many countries even as they failed to stimulate economic growth. With growth estimates trending lower and easy money increasing company leverage, the specter of a debt trap is now haunting advanced economies, the Group of Thirty said.

The Fed has pledged that when it does hike rates, it will be at a slow pace so as not to strangle the U.S. economic recovery, one of the longest, but weakest on record in the post-war period. Yet, forecasts by one regional Fed president shows he expects negative rates in 2016. Most policymakers at the semi-annual IMF meetings this week have presented relatively upbeat forecasts for the world economy and say risks have been largely contained. The G30, however, warned that the 40% decline in commodity prices could presage weaker growth and “debt deflation”. Rates would then have to remain low as central banks would be forced to maintain or extend their bond programs to try and bolster growth and the price of financial assets would fall.

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The liquidity squeeze is universal.

• Quantitative Frightening (Economist)

A defining feature of the world economy over the past 15 years was the unprecedented accumulation of foreign-exchange reserves. Central banks, led by those in China and the oil-producing states, built up enormous hoards of other countries’ currencies. Global reserves swelled from $1.8 trillion in 2000 to $12 trillion by mid-2014. That proved to be a high point. Since then reserves have dropped by at least $500 billion. China, whose reserves peaked at around $4 trillion, has burnt through a chunk of its holdings to prop up the yuan, as capital that had once gushed in started to leak out. Other emerging markets, notably Russia and Saudi Arabia, have also called on their rainy-day stashes. This has sparked warnings that the world faces a liquidity squeeze from dwindling reserves.

When central banks in China and elsewhere were buying Treasuries and other prized bonds to add to their reserves, it put downward pressure on rich-world bond yields. Running down reserves will mean selling some of these accumulated assets. That threatens to push up global interest rates at a time when growth is fragile and financial markets are skittish. Analysts at Deutsche Bank have described the effect as “quantitative tightening”. In principle, rich-world central banks can offset the impact of this by, for instance, additional QE, the purchase of their own bonds with central-bank money. In practice there are obstacles to doing so.

That one country’s reserves might influence another’s bond yields was expressed memorably in 2005 by Ben Bernanke, then a governor at the Federal Reserve and later its chairman, in his “global saving glut” hypothesis. Large current-account surpluses among emerging markets were a reflection of excess national saving. The surplus capital had to go somewhere. Much of it was channelled by central banks into rich-world bonds held in their burgeoning reserves. The growing stockpiles of bonds compressed interest rates in the rich world. Controlling for the range of things that influence interest rates, from growth to demography, economists have attempted to gauge the impact of reserve accumulation.

Francis and Veronica Warnock of the University of Virginia concluded that foreign-bond purchases lowered yields on ten-year Treasuries by around 0.8 percentage points in 2005. A recent working paper by researchers at the ECB found a similar effect: increased foreign holdings of euro-area bonds reduced long-term interest rates by about 1.5 percentage points during the mid-2000s. Yet there are doubts about how tightly reserves and bond yields are coupled. Claudio Borio of the Bank for International Settlements and Piti Disyatat of the Bank of Thailand have noted that Treasury yields tended to rise in 2005-07 even as capital flows into America remained strong, and that rates then fell when those inflows slackened. The link has been rather weak this year, too. Reserves have been run down but bond yields in both America and Europe have also fallen.

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The ‘rescue’ has chased many ‘investors’ out.

• Beijing’s Market Rescue Leaves China Stocks Stuck in the Doldrums (WSJ)

Six weeks after the Chinese stock market hit a floor following a sustained selloff, Beijing can claim credit for halting the decline—but not much else. The Chinese government, which some analysts estimate has spent hundreds of billions of yuan buying stocks to stop the crash, is now left with a market in the doldrums. Shares are languishing near their lows, trading volume is down by about 70% from a peak in June, and volatility has fallen by more than half since July’s record. Valuations in some parts of the market remain among the most expensive anywhere. “Low volume, low volatility and a tight trading range” are hallmarks of a market getting stuck, said Hao Hong, managing director at Bank of Communications Co. If history is a guide, the market could be stuck for some time.

Shanghai’s largest selloff on record, which lasted more than four months during the global financial crisis, knocked 50% off the market’s value. After the benchmark rallied in 2009, it languished for years thereafter. In the heat of this summer’s selloff, Beijing promised that brokerages would buy shares as long as the Shanghai Composite Index remained under the 4500 level. But authorities appear to have given up. After plunging as much as 41% from June to its low point on Aug. 26, the benchmark settled into a tight trading range for more than a month. The Shanghai index rose 4% in the two trading days the past week, after the market reopened on Thursday following a weeklong holiday. It closed up 1.3% on Friday at 3183, still 41% away from the 4500 level.

The weeks of late-day stock surges—indications of intervention by state-backed funds—have been absent recently. Shares of resource-investment company Guangdong Meiyan Jixiang Hydropower surged as much as 153% after disclosing in early August that government agency China Securities Finance Corp. had become its largest shareholder. They have since plummeted 38%. By late September, trading volume for China’s domestic stock market thinned to below 30 billion shares in a single session. That compares with a record of more than 100 billion shares in early June. The average daily volume last month was at its lowest since February.

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Give them a shot at making things worse, and they won’t disappoint.

• Fed Officials Seem Ready To Deploy Negative Rates In Next Crisis (MarketWatch)

Fed officials now seem open to deploying negative interest rates to combat the next serious recession even though they rejected that option during the darkest days of the financial crisis in 2009 and 2010. “Some of the experiences [in Europe] suggest maybe can we use negative interest rates and the costs aren’t as great as you anticipate,” said William Dudley, the president of the New York Fed, in an interview on CNBC on Friday. The Fed under former chairman Ben Bernanke considered using negative rates during the financial crisis, but rejected the idea. “We decided – even during the period where the economy was doing the poorest and we were pretty far from our objectives – not to move to negative interest rates because of some concern that the costs might outweigh the benefits,” said Dudley.

Bernanke told Bloomberg Radio last week he didn’t deploy negative rates because he was “afraid” zero interest rates would have adverse effects on money markets funds – a concern they wouldn’t be able to recover management fees – and the federal-funds market might not work. Staff work told him the benefits were not great. But events in Europe over the past few years have changed his mind. In Europe, the European Central Bank, the Swiss National Bank and the central banks of Denmark and Sweden have deployed negative rates to some small degree. “We see now in the past few years that it has been made to work in some European countries,” he said. “So I would think that in a future episode that the Fed would consider it,” he said.

He said it wouldn’t be a “panacea,” but it would be additional support. In fact, Narayana Kocherlakota, the dovish president of the Minneapolis Fed, projected negative rates in his latest forecast of the path of interest rates released last month. Kocherlakota said he was willing to push rates down to give a boost to the labor market, which he said has stagnated after a strong 2014. Although negative rates have a “Dr. Strangelove” feel, pushing rates into negative territory works in many ways just like a regular decline in interest rates that we’re all used to, said Miles Kimball, an economics professor at the University of Michigan and an advocate of negative rates.

But to get a big impact of negative rates, a country would have to cut rates on paper currency, he pointed out, and this would take some getting used to. For instance, $100 in the bank would be worth only $98 after a certain period. Because of this controversial feature, the Fed is not likely to be the first country that tries negative rates in a major way, Kimball said. But the benefits are tantalizing, especially given the low productivity growth path facing the U.S. With negative rates, “aggregate demand is no longer scarce,” Kimball said.

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That’s the same as saying a crash is inevitable.

• IMF: Keep Interest Rates Low Or Risk Another Crash (Guardian)

The IMF concluded its annual meeting in Lima with a warning to central bankers that the world economy risks another crash unless they continue to support growth with low interest rates. The Washington-based lender of last resort said in its final communiqué that uncertainty and financial market volatility have increased, and medium-term growth prospects have weakened. “In many advanced economies, the main risk remains a decline of already low growth,” it said, and this needed to be supported with “continued accommodative monetary policies, and improved financial stability”. The IMF’s managing director, Christine Lagarde, said there were risks of “spillovers” into volatile financial markets from central banks in the US and the UK increasing the cost of credit.

The IMF has also urged Japan and the eurozone to maintain their plans to stimulate their ailing economies with an increase in quantitative easing. But she urged policymakers in Japan and the eurozone to boost their economies with an expansion of lending banks and businesses via extra quantitative easing. But the policy of cheap credit and the $7 trillion of quantitative easing poured into the world economy since 2009 has become increasingly controversial. A quartet of former central bank governors responded to the IMF’s message with a warning to current policymakers that they risked sowing the seeds of the next financial crisis by prolonging the period of ultra-low interest.

In a study launched in Lima to coincide with the IMF’s annual meeting, the G30 group of experts said keeping the cost of borrowing too low for too long was leading to a dangerous buildup in debt. The study was written by four ex-central bank governors, including Jean-Claude Trichet, former president of the European Central Bank, and Axel Weber, previously president of the German Bundesbank, and now chairman of UBS.

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The inventory-to-sales ratio.

• Last Time This Ratio Soared Like This Was After Lehman Moment (WolfStreet)

This was a data set we didn’t need. Not one bit. It mauled our hopes. But the US Census Bureau dished it up anyway: wholesales declined again, inventories rose again, and the inventory-to-sales ratio reached Lehman-moment levels. In August, wholesales dropped to $445.4 billion, seasonally adjusted. Down 1.0% from July and down 4.7% from August last year. It was ugly all around. Wholesales of durable goods dropped 1.2% for the month, and 1.9% year over year. The standouts: Computer and computer peripheral equipment and software plunged 5.1% for the month and 6.2% year-over-year. Machinery sales dropped 2.7% from July and 3.5% year-over-year. Both are the signature of our ongoing phenomenal white-hot high-tech investment boom in corporate America, focused more on financial engineering than actual engineering.

Wholesales of non-durable goods fell 0.7% for the month and plunged 7.2% year-over year! Standouts: petroleum products (-36.6% year-over-year) and farm products (-12.4% year-over-year). They’ve gotten hammered by the commodities rout. But the pharmaceutical industry is where resourcefulness shines. At $52 billion in wholesales, drugs are the largest category, durable or non-durable. And sales rose another 0.9% for the month and jumped 14% from a year ago! Price increases in an often monopolistic market can perform stunning miracles. Without them, wholesales would have looked a lot worse! Falling sales are bad enough. But ominously, inventories continued to rise from already high levels to $583.8 billion and are now 4.1% higher than a year ago.

Durable goods inventories rose 0.3% for the month and 4.2% year-over-year, with automotive inventories jumping 13.5% year-over-year. Non-durable goods inventories are now 4.0% higher than a year ago, with drugs (+5.4%), apparel (+11.6%), and chemicals (+7.9%) leading the way. But petroleum products inventories dropped 21.9% year-over-year. The crucial inventory-to-sales ratio, which shows how long merchandise gets hung up before it is finally sold, has been getting worse and worse. In July last year, it was 1.17. It hit 1.22 in December. Then it spiked. In August, it rose to 1.31, the level it had reached just after the Lehman moment in 2008:

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What future do we have left?

• Why We Shouldn’t Borrow Money From The Future (John Kay)

More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.” In a delightful essay, Warren Buffett’s business partner, Charlie Munger, pointed out that the concept can be extended much more widely. This psychic wealth can be created without illegality: mistake or self-delusion is enough. Munger coined the term “febezzle,” or “functionally equivalent bezzle,” to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

From this perspective, the critic who exposes a fake Rembrandt does the world no favor: The owner of the picture suffers a loss, as perhaps do potential viewers, and the owners of genuine Rembrandts gain little. The finance sector did not look kindly on those who pointed out that the New Economy bubble of the late 1990s, or the credit expansion that preceded the 2008 global financial crisis, had created a large febezzle. It is easier for both regulators and market participants to follow the crowd. Only a brave person would stand in the way of those expecting to become rich by trading Internet stocks with one another, or would deny people the opportunity to own their own homes because they could not afford them.

The joy of the bezzle is that two people – each ignorant of the other’s existence and role – can enjoy the same wealth. The champagne that Enron’s Jeff Skilling drank when the US Securities and Exchange Commission allowed him to mark long-term energy contracts to market was paid for by the company’s shareholders and creditors, but they would not know that until ten years later. Households in US cities received mortgages in 2006 that they could never hope to repay, while taxpayers never dreamed that they would be called on to bail out the lenders. Shareholders in banks could not have understood that the dividends they received before 2007 were actually money that they had borrowed from themselves.

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Right. It won’t help, but it should be done anyway?!

• Euro Superstate Won’t Save Dysfunctional Single Currency: Ex-IMF Chief (Telegraph)

The euro will be consigned to a permanent state of malaise as deeper integration will bring no prosperity to the crisis-hit bloc, according to the former chief economist of the IMF. In a stark warning, Olivier Blanchard – who spent eight years firefighting the worst global financial crisis in history – said transferring sovereignty from member states to Brussels would be no “panacea” for the ills of the euro. The comments – from one of the foremost western economists of the last decade – pour cold water on grandiose visions for an “EU superstate” being hailed as the next step towards integration in the currency bloc Following this summer’s turmoil in Greece, leaders from France’s Francois Hollande, the European Commission’s Jean-Claude Juncker, and ECB chief Mario Draghi, have spearheaded the drive to create new supra-national institutions such as a eurozone treasury and parliament.

The plans are seen as essential in finally “completing” economic and monetary union 15 years after its inception. But Mr Blanchard, who departed the IMF two weeks ago, said radical visions for a full-blown “fiscal union” would not solve fundamental tensions at the heart of the euro. “[Fiscal union] is not a panacea”, Mr Blanchard told The Telegraph. “It should be done, but we should not think once it is done, the euro will work perfectly, and things will be forever fine.” Although pooling common funds, giving Brussels tax and spending powers, and creating a banking union were “essential” reforms, they would still not make the “euro function smoothly even in the best of cases”, said the Frenchman.

Any mechanism to transfer funds from strong to weak nations – which has been fiercely resisted by Germany – would only mask the fundamental competitiveness problems that will always plague struggling member states, he said. “Fiscal transfers will help you go through the tough spot, but at the same time, it will decrease the urge to do the required competitiveness adjustment.” The creation of a “United States of Europe” has been seen as a necessary step to insulate the eurozone from the financial contagion that bought it to its knees after 2010. It is a view shared by Mr Blanchard’s successor at the IMF, American Maurice Obstfeld, who has championed deeper eurozone integration as the best way to plug the institutional gaps in EMU. Mr Blanchard, however, said no institutional fixes would bring back prosperity back to the single currency.

Without the power to devalue their currency, peripheral economies would forever be forced to endure “tough adjustment”, such as slashing their wages, to keep up with stronger member states, he said. In this vein, Mr Blanchard dismissed any talk of a growth “miracle” in Spain – which has been hailed as a poster child for Brussels’ austerity diktats. He added he was “surprised” that sluggish eurozone economies were not doing better in the face of a cocktail of favourable economic conditions. “When people talk about the Spanish miracle, I react. When you have 23pc unemployment and 3pc growth, I don’t call this a miracle yet.” “I thought that the zero interest rate, the decrease in the price of oil, the depreciation of the euro, the pause in fiscal consolidation, would help more than they have”, he said.

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It makes no difference what IMF and World Bank say. Or do.

• The Real Fight To Win The International Currency Wars (Telegraph)

The IMF and World Bank are divided over the question of currency depreciations as a tool of economic warfare. So who is really right? China’s decision to tweak its exchange rate peg with the dollar in August provoked reactionary howls of derision – from the US to India – that Beijing was gearing up for a new wave of international currency warfare. But do currency wars really work? Ahead of its bi-annual World Economic Outlook in Peru this week, the IMF has waded into the debate. It published a comprehensive set of findings confirming that weaker currencies are still an effective tool for economies to grow their way out of trouble. An exchange rate depreciation of around 10pc, said the IMF, results on average, in a rise in exports that will add 1.5pc to an economy’s output. But both the research and the timing are not uncontroversial.

China’s renminbi revaluation was nowhere near this 10pc magnitude, but its 3pc weakening was still the single biggest move in the exchange rate for more than twenty years. The intervention was seen by some as the opening gambit in another global “race to the bottom”. It sparked concern that China’s neighbouring economies would respond with retaliatory action in a desperate bid to boost flagging growth. The Fund’s research also seemed to confirm an intuitive principle of economics. Weaker currencies mean a country’s export goods are more attractive to external markets by making them cheaper for foreign buyers. Thus, devaluations have a direct and substantial impact in boosting GDP. History also shows that weakening exchange rates are a tried and tested resort for struggling nations trying to artificially boost their competitiveness, protect export shares, and undercut rivals.

But for all its apparent effectiveness, “competitive easing” runs counter to the IMF’s recommendation’s for the world’s economic policymakers. Exchange rate manipulation is a “cheat’s method”. It allows government’s to bypass painful “structural reforms” such as freeing up labour markets, reforming tax policies, and boosting investment – the holy grail of economic policy, long championed by the IMF. The Fund’s findings also put its research department at odds with its sister organisation – the World Bank. Three months before the IMF analysis, the Bank produced its own set of findings which trashed the notion that currency wars still work. Studying 46 countries over 16 years, researchers found that in the wake of the financial crisis, episodes of “large depreciation appeared to have had little impact on exports.”

Instead, the move towards more complex and inter-connected supply chains – spanning countries, continents and currencies – has muddied the relationship between lower exchange rates and cheaper goods. Over a third of all global trade is now made up of export goods whose components are are no longer solely produced in a single economy – or “global value chains” in economist speak. Currency depreciation, in this analysis, is a dud tool for policymakers. The benefits of devaluation in one country can be offset by currency strength in partner economies who make up the chain.

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Big problems for big funds. Just starting.

• When Pension Funds Go Empty, All Bets Are Off (NY Post)

Some 407,000 Teamsters are learning a painful lesson: Their private-sector pensions aren’t as safe as they once thought. Pay attention, government workers -and taxpayers- in New York and New Jersey. Last week, letters informed these Teamsters they’re facing cuts in benefits of up to 60%. Why? Because their pension fund is going broke. The Central States Pension Fund covers workers from more than 1,500 trucking, construction and other companies in 37 states. Thanks to trucking deregulation, declining union rolls, aging workers and weak stock-market returns, the fund is now paying out $3.46 in benefits for every $1 it takes in. That’s $2 billion a year in red ink.

At that rate, doom arrives in 2026, sinking Central States and maybe even the federal fund that’s supposed to insure such private-sector pensions. Retirees would get even lower benefits — or maybe nothing at all. Which is why Congress and President Obama last year gave “multi-employer” funds like Central States the green light to restructure if necessary — and slice benefits. At least a few big pension systems are sure to follow Central States. And so the retirement security countless workers have long counted on went poof. Government pensions aren’t immune. Yes, many state constitutions bar pension cuts — and if the funds sink, politicians would find it easier to hit up taxpayers in a crunch than anger unions and their members by trimming benefits.

Easier at first, anyway. But when the well runs dry, what’ll happen? That’s the nut New Jersey governments have been grappling with in recent years. New York’s situation is better — but it, too, faces a reckoning. That’s even though Jersey’s funds need a whopping $200 billion to make good on their pension promises, while Empire State funds need $308 billion. Driving the shortfalls: Too many retirees for each current worker, as with Central States; overly generous pension promises pols made to please unions — and governments’ habit of not paying what they should into the funds.

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Ouch. The plot thickens and deepens. They still didn’t come clean. “Investors are traumatized by past events, they will be paralyzed if VW’s current diesel line-up has questionable software on board..”

• US Probes A Second VW Emissions Control Device, Failure To Disclose (BBG)

The EPA is investigating a second emissions-control software program in Volkswagen AG cars that were rigged to pass pollution tests, one that the automaker may have failed to properly disclose. The computer program is on the EA 189 diesel engines used since 2009 that are also fitted with software that the automaker has admitted was designed to fool emissions tests, according to a person familiar with the matter who asked not to be named because the information is private. “VW did very recently provide EPA with very preliminary information on an auxiliary emissions control device that VW said was included in one or more model years,” EPA spokesman Nick Conger said. The agency, as well as its California counterpart, “are investigating the nature and purpose of this recently identified device.”

The possibility of a second device under scrutiny will make it harder for Volkswagen to emerge from the crisis. Already, VW faces criminal and civil liability as a company, including more than 250 class-action lawsuits. Some of its executives also face individual charges, and investigators and prosecutors are trying to figure out just how widespread the cheating was. The device was disclosed in applications to regulators for the 2.0 liter turbo diesel engine models to be sold next year, the company said Saturday in an e-mailed statement from Wolfsburg, Germany. The EPA and the California Air Resources Board are reviewing the device, which VW said serves to warm up the engine, and additional information is being submitted, according to the statement.

Automakers are required to point out if engines have special operating modes that can affect the way pollution-control equipment works. Such programs aren’t necessarily prohibited, and don’t by themselves indicate an attempt to cheat, though carmakers are supposed to disclose them so regulators can adjust their tests to be sure the vehicles still meet standards. Volkswagen has withdrawn applications for EPA certification of diesel vehicles for the 2016 model year. The company decided the newly disclosed technology qualified as an emissions-control device that the EPA needed to review, Michael Horn, the president and chief executive officer of Volkswagen of America, told Congress Thursday.

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The crumbling walls of Berlin.

• Germany Readies For More Woe As Scandal And Slowdown Hit Economy (Observer)

When the German football team lost 1-0 to the Republic of Ireland on Thursday night in a European championship qualifying match, it capped a grim week for national pride. The shock defeat on the football field followed the ritual grilling of Michael Horn, the US boss of disgraced car-maker Volkswagen, by the US Congress; record losses at the country’s biggest bank, Deutsche Bank; and a clutch of dire economic figures, including the sharpest drop in exports since 2009. Suddenly, the health of Germany’s economy, powerhouse of the 19-member eurozone, is under question, just as the slowdown in emerging markets, including China, starts to take its toll. Volkswagen, for decades the ultimate symbol of lean, beautifully engineered German industry, is a byword for shoddy corporate practices since it admitted to deceiving regulators over emissions from its diesel cars.

Horn apologised during the bruising congressional hearing, and was forced to concede that it was “very hard to believe” that the scandal was the work of a few rogue engineers. Ben May of consultancy Oxford Economics says it is not yet clear how the Volkswagen scandal will affect the wider German economy, but it could have a considerable impact if it undermines confidence in diesel cars generally. “Diesel cars are the speciality of European manufacturers,” he says. “If you start to see buyers ditch diesel, or policymakers put in place regulations that mean it’s harder to produce cheap, compliant diesel cars, you might see Japanese and American producers gaining a bigger share of the European market.”

Meanwhile Frankfurt-based Deutsche Bank, which is being reshaped by its new boss, John Cryan, announced its largest-ever loss, more than €6bn, in the third quarter. Shareholders welcomed the announcement as a signal that Cryan was taking an aggressive approach to turning Deutsche Bank around, and would not be asking them to contribute more capital. But news that another pillar of the German corporate establishment looked shaky added to the sense of uncertainty. Germany’s economic model is heavily dependent on exports, including to fast-growing emerging economies, a specialism that has served it well in recent years. But analysts say the sharp decline in exports – they fell by more than 5% in August – could be the first solid evidence that the downturn in emerging markets has started to hit home in Europe.

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“..charges to be prepared against Drumm on up to 30 different offences.”

• Ex-CEO Of Anglo Irish Bank In US Custody Facing Extradition (Guardian)

US marshals in Massachusetts have arrested David Drumm – the former chief executive of Anglo Irish Bank who is seen as a culprit in Ireland’s banking crisis – on an extradition warrant, according to the US attorney’s office in the state. A spokeswoman for the the US attorney in the District of Massachusetts, Christina DiIorio-Sterling, said: “I can confirm that Mr Drumm was arrested by US Marshals in Massachusetts on an extradition warrant. He will remain in custody until his hearing in federal court in Boston on Tuesday.” It was reported in January that Ireland had sent an extradition file to the US government, outlining charges to be prepared against Drumm on up to 30 different offences.

The Irish office of public prosecutions, which has brought other Anglo Irish Bank executives to trial, requested in July that a parliamentary inquiry into Ireland’s banking crisis not publish a statement Drumm had issued to it. Drumm stepped down from the one-time stock market titan in December 2008, a month before it was nationalised. He filed for bankruptcy in his new home of Boston two years later, owing his former employer more than $11m from loans he had been given. A Boston court dismissed his application as not remotely credible earlier in 2015, saying he had lied and acted in a fraudulent manner in his bid to be declared bankrupt in the United States.

Bailing out the failed bank that Drumm ran from 2005 to 2008 cost taxpayers around €30bn, close to one-fifth of Ireland’s annual output. It was seen as the heart of a banking crisis that forced Ireland itself into a 2010 international bailout. In July an Irish court sentenced three former employees of Anglo Irish Bank to between 18 and 36 months in prison, the first bankers to be jailed since the country’s financial crash.

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“..it is doubtful that China can achieve the consumption-driven rebalancing that it seeks. After all, no high-performing East Asian economy has achieved such a rebalancing in the past, and China has a similar growth model…”

• China’s Monetary-Policy Choice (Zhang Jun)

Since assuming office in 2013, Premier Li Keqiang’s government has chosen not to loosen the previous government’s rigorous macro policies, instead hoping that the resulting pressure on existing industries might help to stimulate the authorities’ sought-after structural shift toward household consumption and services. Economists welcomed this ostensibly reasonable approach, which would slow the expansion of credit that had enabled a massive debt build-up in 2008-2010. China’s lower growth trajectory was dubbed the “new normal.” But, for this approach to work, GDP growth would have had to remain steady, rather than decline sharply. And that is not what has happened. Indeed, although structural adjustment continues in China, the economy is facing an increasingly serious contraction in demand and continued deflation.

The consumer price index (CPI) has remained below 2%, and the producer price index (PPI) has been negative, for 44 months. In a country with a huge amount of liquidity – M2 (a common measure of the money supply) amounts to double China’s GDP – and still-rising borrowing costs, this makes little sense. The problem is that the government has maintained a PPI-adjusted benchmark interest rate that exceeds 11%. Interest rates reach a ludicrous 20% in the shadow banking sector, and run even higher for some private lending.
The result is excessively high financing costs, which have made it impossible for firms in many manufacturing industries to maintain marginal profitability. Moreover, the closure of local-government financing platforms, together with the credit ceiling imposed by the central government, has caused local capital spending on investment in infrastructure to drop to a historic low.

And tightening financial constraints have weakened growth in the real-estate sector considerably. With local governments and companies struggling to make interest payments, they are forced into a vicious cycle, borrowing from the shadow banking sector to meet their obligations, thereby raising the risk-free interest rate further. If excessively high real interest rates are undermining the domestic demand that China needs to reverse the economic slowdown, one naturally wonders why the government does not take steps to lower them. The apparent answer is the government’s overriding commitment to shifting the economy away from investment- and export-led growth. But it is doubtful that China can achieve the consumption-driven rebalancing that it seeks. After all, no high-performing East Asian economy has achieved such a rebalancing in the past, and China has a similar growth model.

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Most western media headlines say “Thousands protest…”. Regardless, you’d need millions to have any effect.

• Hundreds Of Thousands Protest EU-US TTiP Trade Deal in Berlin (Reuters)

At least 150,000 people marched in Berlin on Saturday in protest against a planned free trade deal between Europe and the United States that they say is anti-democratic and will lower food safety, labor and environmental standards. Organizers – an alliance of environmental groups, charities and opposition parties – said 250,000 people had taken part in the rally against free trade deals with both the United States and Canada, far more than they had anticipated. “This is the biggest protest that this country has seen for many, many years,” Christoph Bautz, director of citizens’ movement Campact told protesters in a speech. Police said 150,000 people had taken part in the demonstration which was trouble free. There were 1,000 police officers on duty at the march.

Opposition to the so-called Transatlantic Trade and Investment Partnership (TTIP) has risen over the past year in Germany, with critics fearing the pact will hand too much power to big multinationals at the expense of consumers and workers. “What bothers me the most is that I don’t want all our consumer laws to be softened,” Oliver Zloty told Reuters TV. “And I don’t want to have a dictatorship by any companies.” Dietmar Bartsch, deputy leader of the parliamentary group for the Left party, who was taking part in the rally said he was concerned about the lack of transparency surrounding the talks. “We definitely need to know what is supposed to be being decided,” he said. Marchers banged drums, blew whistles and held up posters reading “Yes we can – Stop TTIP.”

The level of resistance has taken Chancellor Angela Merkel’s government by surprise and underscores the challenge it faces to turn the tide in favor of the deal which proponents say will create a market of 800 million and serve as a counterweight to China’s economic clout. In a full-page letter published in several German newspapers on Saturday, Economy Minister Sigmar Gabriel warned against “scaremongering”. “We have the chance to set new and goods standards for growing global trade. With ambitious, standards for the environment and consumers and with fair conditions for investment and workers. This must be our aim,” Gabriel wrote.

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For the 2020 Olympics?!

• Tepco Expects To Begin Freezing Ice Wall At Fukushima No. 1 By Year-End (BBG)

Tokyo Electric Power Co. expects to begin freezing a soil barrier by the end of the year to stop a torrent of water entering the wrecked Fukushima nuclear facility, moving a step closer to fulfilling a promise the government made to the international community more than two years ago. “In the last half-year we have made significant progress in water treatment,” Akira Ono, chief of the Fukushima No. 1 plant, said Friday during a tour of the facility northeast of Tokyo. The frozen wall, along with other measures, “should be able to resolve the contaminated water issues before the (2020) Olympic Games.” Solving the water management problems will be a major milestone, but Tepco is still faced with a number of challenges at the site.

The company must still remove highly radioactive debris from inside three wrecked reactors, a task for which no applicable technology exists. The entire facility must eventually be dismantled. Currently, about 300 tons of water flow into the reactor building daily from the nearby hills. Tepco has struggled to decommission the reactors while also grappling with the buildup of contaminated water. Even four years after the meltdowns and despite promises from policymakers, water management remains one of Tepco’s biggest challenges in coping with the fallout of Japan’s worst nuclear disaster.

The purpose of the ice wall — a barrier of soil 30 meters (98 feet) deep and 1,500 meters (0.9 mile) long which is frozen to -30 degrees Celsius (-22 Fahrenheit) — is to prevent groundwater from flooding reactor basements and becoming contaminated. “As the radiation levels decrease via natural decay, water management becomes the main issue,” Dale Klein, an independent adviser for Tepco and a former chairman of the U.S. Nuclear Regulatory Commission, said by e-mail. “It is a very important issue for the public, and good water management is needed for Tepco to restore the public’s trust.”

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Yeah, don’t give them TVs or radios. Who knows what they might do.

• UK Home Office Bans ‘Luxury’ Goods For Syrian Refugees (Observer)

The Home Office warned councils against providing Syrian refugees with “luxury” items days before the home secretary, Theresa May, delivered an uncompromising speech limiting the right to claim asylum in Britain. Local authorities were sent new draft guidance on refugee resettlement in the week before May’s anti-immigration speech on Tuesday, rhetoric that critics said articulates the government’s increasingly hostile attitude towards refugees and asylum seekers. The Home Office guidance states that councils should not offer white or brown goods that might be deemed nonessential to resettled Syrians as part of the vulnerable persons resettlement scheme. Items that appear not to be allowed include fridges, cookers, radios, computers, TVs and DVDs.

Charities expressed concern, saying that the government should be concentrating on setting minimum standards for all Syrians seeking sanctuary in the UK instead of stating what they should not be allowed. “Child refugees aren’t coming here for our services, they are coming for our protection. We should give it gladly,” said Kirsty McNeill, campaigns director for charity Save the Children. The head of refugee support at the British Red Cross, Alex Fraser, said that all accommodation provided should afford “dignity and safety”. “People fleeing violence and persecution have been forced to endure the most appalling ordeals, and when they arrive in the UK they should be given the best possible start,” he said. Lisa Doyle, head of advocacy at the Refugee Council, said: “Resettling refugees in Britain shouldn’t just be about basic survival: everyone needs to be given the tools to build a life.”

The government has been accused of an inadequate response to the Syrian refugee crisis in recent months. In early September, under considerable pressure, David Cameron pledged that the UK would accept 20,000 refugees from camps bordering Syria over the next five years, and that the resettlement programme would prioritise vulnerable children and orphans. One local authority, Islington council in north London, confirmed it had received new draft guidance that permitted provision of “food storage, cooking and washing facilities” but it said that accommodation “should not include the provisions of other white goods and brown goods which could be considered luxury items”.

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All upcoming attention for the Paris talks will be wasted or worse.

• World Will Pass Crucial 2ºC Global Warming Limit (Observer)

Pledges by nations to cut carbon emissions will fall far short of those needed to prevent global temperatures rising by more than the crucial 2C by the end of the century. This is the stark conclusion of climate experts who have analysed submissions in the runup to the Paris climate talks later this year. A rise of 2C is considered the most the Earth could tolerate without risking catastrophic changes to food production, sea levels, fishing, wildlife, deserts and water reserves. Even if rises are pegged at 2C, scientists say this will still destroy most coral reefs and glaciers and melt significant parts of the Greenland ice cap, bringing major rises in sea levels.

“We have had a global temperature rise of almost 1C since the industrial revolution and have already seen widespread impacts that have had real consequences for people,” said climate expert Professor Chris Field of Stanford University. “We should therefore be striving to limit warming to as far below 2C as possible. However, that will require a level of ambition that we have not yet seen.” In advance of the COP21 United Nations climate talks to be held in Paris from 30 November to 11 December, every country was asked to submit proposals on cutting use of fossil fuels in order to reduce their emissions of greenhouses gases and so tackle global warming. The deadline for these pledges was 1 October.

A total of 147 nations made submissions, and scientists have since been totting up how these would affect climate change. They have concluded they still fall well short of the amount needed to prevent a 2C warming by 2100, a fact that will be underlined later this week when the Grantham Research Institute releases its analysis of the COP21 submissions. This will show that the world’s carbon emissions, currently around 50bn tonnes a year, will still rise over the next 15 years, even if all the national pledges made to the UN are implemented. The institute’s figures suggest they will reach 55bn to 60bn by 2030.

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Debt Rattle September 30 2015

Sep 302015
 
 September 30, 2015  Posted by at 8:26 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle September 30 2015


Marjory Collins 3rd shift defense workers, midnight, Baltimore April 1943

• Equities On Course For Worst Quarter Since 2011 (FT)
• September 30 Is Historically Worst Day Of The Year For Investors (MarketWatch)
• ‘Cold Fusion’ Is Citi’s Answer to Fading Central Bank Firepower (Bloomberg)
• Loss Of Traction Puts Central Bank Mandates Under Scrutiny (Reuters)
• Two Very Disturbing Forecasts By A Former Chinese Central Banker (Zero Hedge)
• Jim Chanos on China: The Emperor is In His Underwear (Lynn Parramore)
• Bundesbank Chief Warns Of Risks From Cheap Money (Reuters)
• Investors Pull $40 Billion From Emerging Markets in Current Quarter (WSJ)
• Traders Flee Emerging Markets at Fastest Pace Since 2008 (Bloomberg)
• IMF Warns Of New Financial Crisis If Interest Rates Rise (Guardian)
• World Set For Emerging Market Mass Default, Warns IMF (Telegraph)
• Volkswagen Board Member: Staff Acted Criminally (BBC)
• Volkswagen Spain Faces Criminal Complaint Over Emissions Tests (Bloomberg)
• Volkswagen To Refit Cars Affected By Emissions Scandal (Reuters)
• Obama Re-Defines Democracy – A Country that Supports US Policy (Michael Hudson)
• Greek Crisis a Tragedy For Education System (BBC)
• Frackers Could Soon Face Mass Extinction (Fortune)
• Chinese Buyers Holding Back On ‘High-End’ New Zealand Property (NZ Herald)
• Berlin To Curb Refugees As Merkel Faces Backlash (FT)
• Risking Arrest, Thousands Of Hungarians Offer Help To Refugees (NPR)

Debt deflation.

• Equities On Course For Worst Quarter Since 2011 (FT)

US and global equities are heading for their worst quarterly performance since 2011, with investors rattled by China’s economic slowdown, uncertainty over Federal Reserve policy and growing pessimism about corporate earnings. Adding to investors unease, the IMF on Tuesday warned that corporate failures were likely to jump in the developing world, after a borrowing binge in the past decade. With an array of sectors slumping since the start of July, beyond those directly influenced by the rout in commodity prices, the global equity bull run of recent years is now facing a major challenge. The S&P 500 has fallen 8.5%, the biggest decline since the third quarter of 2011. Previously high-flying sectors that led the market earlier this year, notably biotech and healthcare stocks, have fallen appreciably in recent weeks.

“The question now is are investors ready for the first down year since 2011…and the worst year since the “bad days of 2008”, said Howard Silverblatt, analyst at S&P Dow Jones Indices. In turn, global stock markets are poised for their worst quarterly showing since 2011, shedding more than $10tn in value. The FTSE Emerging Index has tumbled more than 21% this quarter, its worst showing since 2011, and the fifth-worst quarter this millennium. Investors have become increasingly unsettled by signs of weakening global growth and are now questioning the earnings outlook for US companies as the world’s largest economy is preparing to raise rates for the first time in nearly a decade. The US earnings season, which starts in two weeks, is shaping up as pivotal driver of sentiment, Mr Silverblatt said.

Analysts expect quarterly earnings will decline 4.6% year over year in the third quarter, and revenue to decline 3.3%, the third straight quarter of declines for top-line growth, according to the data provider, FactSet. US and global companies have sold record amounts of debt against the backdrop of a blockbuster year for mergers and acquisitions. M&A, equity capital markets, debt capital markets and syndicated lending produced fees of $16.5bn in the third quarter, the lowest total since banks billed $16.3bn in the final three months of 2011 when markets were gripped by the eurozone debt crisis. Under pressure from rising defaults linked to the energy sector, corporate bond prices are signalling broader weakness that reflects the downgrading of global growth prospects, notably for emerging markets.

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Oh well…

• September 30 Is Historically Worst Day Of The Year For Investors (MarketWatch)

September has been tough for stock investors. But if history is any guide, the last day of September may deliver one more blow to already battered markets, according to the financial blog Bespoke. Looking at data as far as 1945, the S&P 500 has posted positive returns just 38% on the last day of September, making it one of the worst trading days of the year, according to Bespoke (as the included table illustrates). Earlier this month, financial blogger Ryan Detrick pointed out that the 38th, 39th and the 40th weeks of the calendar—which fall in September—tend to be the weakest of the year dating back to 1950.

September has marked a particularly rough stretch for the S&P 500 with only the week of Sept. 11 closing higher as China’s slowdown, global economic uncertainties, and lack of clarity on the timing of the Federal Reserve’s expected interest-rate hike have shaken investor confidence. According to FactSet, weekly performance in 2015 for the S&P 500 was among the worst in September. For the week, the benchmark stock-market index is off 2.3% so far, putting it on track for the second-worst week of the year after Aug. 21 when the benchmark tumbled 5.8%. If tomorrow’s trading action follows the historical trend, things could get worse for investors before they get better.

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Banks rule the world.

• ‘Cold Fusion’ Is Citi’s Answer to Fading Central Bank Firepower (Bloomberg)

If the world economy enters a downdraft, Steven Englander, global head of G-10 FX strategy at Citigroup, proposes a more revolutionary response, akin to the “helicopter money” once advocated by Milton Friedman. In what he calls “cold fusion,” politicians would cut taxes and boost spending. Central banks would then cover the resulting increase in borrowing by purchasing more bonds as part of a commitment to permanently expand their balance sheets. The easier fiscal policy would be covered by QE Infinity. “Politically it is difficult for central banks to outright endorse monetization of government debt, but faced with another slump and armed with ineffective policy tools, we expect that central banks will quickly give the wink and nod to fiscal measures,” Englander said in a report to clients last week.

The upshot would be greater purchasing power would be injected straight into the economy, increasing activity and inflation. Long-term bond yields would rise, yet short-term yields adjusted for inflation would turn negative. “Increasingly the absence of fiscal policy is viewed as one of the reasons for a less than satisfactory recovery,” said Englander. “With rates at zero, fiscal policy will be needed to offset any negative shock that hits global economies.” Michala Marcussen, head of global economics at Societe Generale SA in London, agrees. “In a risk scenario, we believe policy makers, faced with the abyss, would take the next step into unorthodox policy, namely fiscal expansion,” she said. “Clearly not the risk that bond markets have in mind.”

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“..relatively slow growth and over-reliance on cheap credit to cope with that funk has “zombified” global economies for years to come..”

• Loss Of Traction Puts Central Bank Mandates Under Scrutiny (Reuters)

Growing anxiety that the world’s top central banks have lost control of their mission has intensified scrutiny of their mandates and independence from both political and investment circles. Far from soothing already nervy financial markets, the Fed’s decision not to raise interest rates in September raised more questions than it answered. The turbulent response of equity, commodity and emerging markets marks this as a rare, if not singular instance in recent years of markets reacting so negatively to an ostensibly dovish policy signal from the Fed. Chief among the questions is whether the world’s most influential central bank, along with many of its peers, is trapped at near zero interest rates as the economic cycle crests and inflation flatlines, due to a rapid cooling of China and other emerging economies and a commodity price slump.

The uncomfortable prospect of heading into another economic slowdown with no interest rate ammunition to fight the downturn is at the root of much that investment angst. “The relative paucity of the monetary policy toolkit increases the fragility of the expansion, with risks that an adverse shock could lead businesses and consumers to retrench and thereby transform a mid-cycle slowdown into something significantly worse,” wrote Citi chief economist Willem Buiter. Yet by subsequently insisting a rate rise was still on the cards this year, the Fed simultaneously removed any low-rates balm and confused many as to its ‘reaction function’. Just which of the global pressures that stayed its hand only two weeks ago – weakening China, emerging markets and commodity prices – will disappear again by year end?

And if the rise of the dollar is at least partly behind both those pressures and the below-target U.S. inflation rate, then surely every future push to raise rates will simply strengthen the currency again and re-ignite the same chain reaction. “You can’t run a independent, domestically-focused monetary policy in this environment,” said Salman Ahmed, chief strategist at asset managers Lombard Odier, adding that a major complication is the huge uncertainty internally at the Fed about just how the world’s second biggest economy, China, is actually performing. “What has happened is that central banks have lost control to calibrate monetary policy to only domestic economic data.” The Fed may be in the hot seat, but the Bank of England has a similar dilemma.

The Bank of Japan and ECB differ only in that there’s no domestic pressure yet to tighten policy. But their attempts to avoid deep deflation and reach explicit inflation targets seem to be similarly sideswiped by global rather than domestic developments. And that’s not changing any time soon. In a world that’s wound down very little of its overall indebtedness some seven years after the credit crash was supposed to launch a wave of ‘deleveraging’, relatively slow growth and over-reliance on cheap credit to cope with that funk has “zombified” global economies for years to come, Ahmed added. And in such a low growth world, political pressure to bring central banks into a more centrally-directed policy framework will only increase.

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“..the failure will have serious consequences on China’s financial stability..”

• Two Very Disturbing Forecasts By A Former Chinese Central Banker (Zero Hedge)

Earlier today, Yu Yongding – currently a senior fellow at the Chinese Academy of Social Sciences in Beijing but most notably a member of the PBOC’s Monetary Policy Committee from 2004 to 2006 as well as a member of China’s central planning bureau itself, the Advisory Committee of National Planning – gave a speech before the Peterson Institute, together with a slideshow. Since the topic was China’s debt, economic growth, corporate profitability, and since, inexplicably, it wasn’t pre-cleared by the Chinese department of truth, it was not cheerful. In fact it was downright scary. Among other things, the speech discussed:
• Capital efficiency – low and falling (capital-output ratio rising)
• Corporate profitability – has been falling steadily
• Share of finance via capital market – Very low
• Interest rate on loans – High
• Inflation rate – producer price Index is falling

A key observation was the troubling surge in China’s capital coefficient, first noted here two weeks ago in a presentation by Daiwa which also had a downright apocalyptic outlook on China, and wasn’t ashamed to admit that it expects a China-driven global meltdown, one which “would more than likely send the world economy into a tailspin. Its impact could be the worst the world has ever seen.” The former central banker also discussed the bursting of China’s market bubble. This, he said was created deliberately for two government purposes: 1) To enable debt-ridden corporates to get funds from the equity market, 2) To boost share prices to stimulate demand via wealth effect He admits this shortsighted approach failed and “to save the city, we bombed the city” adding that it brings “authorities’ ability of crisis managing into question.”

He also observes that the devaluation that took place on August 11 was the government’s explicit admission that its attempt to reflate an equity bubble has failed, and it was forced to find an alternative method of stimulating the economy. Of the CNY devaluaton Yu says quite clearly that it was simply to boost the economy: “In the first quarter of 2015 China’s capital account deficit is larger that than that of current account surplus” which is due to i) The Unwinding of Carry trade; ii) The diversification of financial assets by households; iii) Outbound foreign investment; and iv) Capital flight. And now that China has officially unleashed devaluation (which Yu believes should be taken to its logical end and the RMB should float) there are very material risks: “the implication of episode can be more serious than the stock market fiasco, with much large international consequences” and that “the failure will have serious consequences on China’s financial stability”

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“If you do dumb economic things, whether you’re capitalist, communist, or some hybrid, you ultimately pay the price.”

• Jim Chanos on China: The Emperor is In His Underwear (Lynn Parramore)

[..] China is the only industrialized country that knows its annual GDP on Jan. 1 of that year. Because it’s planned. You can truly manufacture your growth. Now, you may end up with lots of white elephants and a banking system with lots of bad loans, and that’s the problem, whether you’re a closed system or an open system or somewhere in between (which is what I believe): a closed system with lots of leakage. At the end of the day, other countries have tried this model and it doesn’t really work that well. The Soviet Union and Japan, to some extent, in the late 80s, followed this model. If you do dumb economic things, whether you’re capitalist, communist, or some hybrid, you ultimately pay the price.

[..] We’re getting inexorably to a tipping point in China. What has made 2015 much different from 2010, other than magnitude (almost everything I saw in 2009-2010 is twice as big today: the banking system, the economy, debt to GDP), is that the veneer of technocratic excellence has been wiped away. Now the West sees that the problems. That was not the case in 2010. I was considered a crank, someone who had never been there, never spoken Mandarin. They said, you don’t know, these people are geniuses! Now I think we’ve begun to see that, no, they make the same policy mistakes that we make. They don’t always get it right.

The other thing that’s changed dramatically, and I think more ominously, is the rise of Xi Jinping, who is a much different leader than the previous two groups of party leaders. Under Hu Jintao and Jiang Zemin, China was open for business. As long as you don’t rock the political boat, you can go to Macau, buy your three Ferraris, have fun, make money. This is the new China. Then Xi comes in, and his first speech is a fiery speech in Guangdong Province, where he absolutely rips into the Soviet Union for being soft on Perestroika. He says, what were you guys thinking about? Why didn’t you put the troops on the street the first chance you got? That was his first speech.

One of the next things he did was – I know this sounds silly, but to me it was very telling — he told the auto show models to cover up. Think about that for a second. He truly said, they’re showing too much skin and this is an embarrassment to China. Cover up! He told the kids, go to bed earlier! I began to see that this guy is different. This guy really sees himself as father of China. Some might say that now he sees himself as an emperor. Sure enough, the cult of personality stuff started. He made the PLA (People’s Liberation Army) senior officers take an oath of personal loyalty to him. That’s very important. His nationalism, which was unmistakable and you couldn’t miss it by 2013-14, has also taken on a very anti-Western tone. Now, if there’s a problem with the stock market, it’s Western speculators. If there’s something going on, it’s the West’s fault.

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Weidmann wants everyone to be Germany. But that is no longer such a glorious prospect.

• Bundesbank Chief Warns Of Risks From Cheap Money (Reuters)

The dip in oil prices will save German companies and individuals €25 billion this year, the head of the Bundesbank said on Tuesday, as he warned of the perils of keeping the cost of money too low. “The expansionary monetary policy should not go on for longer than is absolutely necessary,” Jens Weidmann told an audience near Frankfurt, saying the economic recovery in the 19-member euro zone was holding steady. The remarks from Weidmann illustrate the continued scepticism in Germany about the need to extend the ECB’s €1 trillion-plus money printing program.

While such opposition cannot prevent extra money printing, it can delay any such move. Weidmann, who also sits on the ECB’s policy-setting Governing Council, argued that cheap money, with borrowing rates at record low in the euro zone, risked that financial markets would ‘overdo it’. He also pointed to the threat that permanently low borrowing costs would keep ‘zombie’ companies afloat that should be out of business. Weidmann also criticized the negative impact of low interest rates on German savers, who he said earned a fraction of a percentage point of interest on their deposits.

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“Companies from developing countries quadrupled their borrowing to well over $18 trillion last year from around $4 trillion in 2004..”

• Investors Pull $40 Billion From Emerging Markets in Current Quarter (WSJ)

Foreign capital is gushing out of emerging markets. Global investors are estimated to have yanked $40 billion from emerging-market stocks and bonds during the current quarter, the most for a quarter since the depths of the 2008 global financial crisis, according to the latest data from the Institute of International Finance. The retrenchment reflected growing tensions in some of the world’s once-highflying emerging economies, which are struggling with slower growth, substantial debt and plunging prices for commodities, which many of these economies rely on. In a report published on Tuesday, the IMF warned that emerging markets could brace for a rise in corporate failures as debt-laden firms find it harder to repay their loans and bonds as a result of sputtering growth and weakening currencies.

Companies from developing countries quadrupled their borrowing to well over $18 trillion last year from around $4 trillion in 2004, with Chinese firms accounting for a major share, according to the bank. Thanks to low interest rates in developed countries, many of the borrowings were conducted in hard currencies, such as the dollar and euro. Investor confidence in emerging markets was further shaken in the quarter by an epic stock-market crash in China, as well as Beijing’s botched efforts to prop up share prices. The selloff in emerging markets accelerated and rattled global financial markets after the Chinese central bank’s move to let its currency devalue in August fueled suspicions that China’s underlying economy might be faring worse than expected.

These concerns had a knock-on effect on commodities, driving prices down to levels not seen in six years. As the biggest buyer of many commodities from countries including Brazil, South Africa and Malaysia, China’s woes hurt these countries’ currencies. “Emerging markets are going to be a very difficult place to invest in for the next 12 to 24 months,” said David Spika, global investment strategist at GuideStone Capital, which oversees $10.7 billion in assets. Falling commodity prices hurt many emerging countries’ growth, leading to capital outflows and weakening their currencies, he said.

Many emerging countries rely on outside capital to finance their budget deficits, and the continuous outflow is already forcing some of these countries to devalue their currencies or dip into their foreign-currency reserves to defend their exchange rates. This quarter’s exodus was about evenly divided between equities and bonds, losing $19 billion and $21 billion, respectively, according to the IIF. The $40 billion outflow would rank the current quarter the worst quarter since the fourth quarter of 2008 when emerging markets saw outflows of about $105 billion.

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“It’s the trifecta of slowing investment growth, declining commodity prices and the strong dollar.”

• Traders Flee Emerging Markets at Fastest Pace Since 2008 (Bloomberg)

Investors have pulled $40 billion out of developing economies in the third quarter, fleeing emerging markets at the fastest pace since the height of the global financial crisis. The quarterly outflow was the first since 2009 and the biggest since the final three months of 2008, when traders sold $105 billion of assets, according to the Institute of International Finance. The retreat came as data signaled faltering Chinese economic growth, commodity prices slumped and the Federal Reserve moved closer to an increase in the near-zero U.S. interest rates that have supported demand for riskier assets in developing nations. About $19 billion of the selloff was equities, with the remaining $21 billion in debt, the IIF said in a report Tuesday. There were outflows in all three months this quarter.

The MSCI Emerging Markets stocks benchmark has declined 20% in the past three months, on track for the biggest retreat in four years. Local-currency developing-nation bonds have lost 6.6% in dollar terms in the third quarter, according to Bank of America Corp. indexes, the biggest retreat on a quarterly basis since 2011. Currencies from Brazil to South Africa have tumbled, sending a gauge of 20 foreign-exchange rates to a record low. “The reaction we’re seeing is quite severe, but a lot of the damage has already probably taken place,” Brendan Ahern, managing director of Krane Fund Advisors LLC in New York, said by phone. “It’s the trifecta of slowing investment growth, declining commodity prices and the strong dollar.”

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Speaking in forked tongues.

• IMF Warns Of New Financial Crisis If Interest Rates Rise (Guardian)

Rising global interest rates could prompt a new credit crunch in emerging markets, as businesses that have ridden the wave of cheap money to load up on debt are pushed into crisis, the International Monetary Fund has said. The debts of non-financial firms in emerging market economies quadrupled, from $4tn in 2004 to well over $18tn in 2014, according to the IMF’s twice-yearly Global Financial Stability Report. This borrowing binge has taken business debt as a share of economic output from less than half, in 2004, to almost 75%. China’s firms have led the spree, but businesses in other countries, including Turkey, Chile and Brazil, have also ramped up their debts — and could prove vulnerable as interest rates rise.

With the US Federal Reserve expected to raise interest rates in the coming months, the IMF warns that emerging market governments should ready themselves for an increase in corporate failures, as firms struggle to meet sharply higher borrowing costs. That could create distress among the local banks who have bought much of this new debt, causing them in turn to rein in lending, in a “vicious cycle” reminiscent of the credit crisis of 2008-09. “Shocks to the corporate sector could quickly spill over to the financial sector and generate a vicious cycle as banks curtail lending. Decreased loan supply would then lower aggregate demand and collateral values, further reducing access to finance and thereby economic activity, and in turn, increasing losses to the financial sector,” the IMF warns.

Its economists find that the sharp increase in borrowing has been driven largely by international factors, including the historically low interest rates and quantitative easing unleashed by central banks in the US, Japan and Europe, as they have sought to rekindle growth in the wake of the sub-prime crisis. “Monetary policy has been exceptionally accommodative across major advanced economies. Firms in emerging markets have faced greater incentives and opportunities to increase leverage as a result of the ensuing unusually favourable global financial conditions,” the IMF says.

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A deep dark hole lies right ahead.

• World Set For Emerging Market Mass Default, Warns IMF (Telegraph)

The IMF has issued a double warning over higher US interest rates, which it said could trigger a wave of emerging market corporate defaults and panic in financial markets as liquidity evaporates. The IMF said corporate debts in emerging markets ballooned to $18 trillion last year, from $4 trillion in 2004 as companies gorged themselves on cheap debt. It said the quadrupling in debt had been accompanied by weaker balance sheets, making companies more vulnerable to US rate rises. “As advanced economies normalise monetary policy, emerging markets should prepare for an increase in corporate failures,” the IMF said in a pre-released chapter of its latest Financial Stability Report.

It warned that this could create a credit crunch as risks “spill over to the financial sector and generate a vicious cycle as banks curtail lending”. In a double warning, the IMF said market liquidity, or the ease with which investors can quickly buy or sell securities without shifting their price, was “prone to sudden evaporation”, particularly in bond markets, when the Federal Reserve started to raise interest rates. It said a steady growth environment and “extraordinarily accommodative monetary policies” around the world had helped to maintain a “high level” of liquidity. However, it warned that this was not the same as “resilient” liquidity that could support markets in time of stress.

Gaston Gelos, head of the IMF’s global financial stability division, said these factors were “masking liquidity risks” that could trigger violent market swings. “Liquidity is like the oil in an engine, when there’s too little of it, the machine starts stuttering,” he said. The IMF said an “illusion” of abundant liquidity may have encouraged “excessive risk taking” by some investors that could cause market ructions if many investors suddenly rushed to the exit. “Even seemingly plentiful market liquidity can suddenly evaporate and lead to systemic financial disruptions,” the IMF said. “When liquidity drops sharply, prices become less informative and less aligned with fundamentals, and tend to overreact, leading to increased volatility. In extreme conditions, markets can freeze altogether, with systemic repercussions.”

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Politicans and board members should draw their own consequences, not point to others. This guys is both.

• Volkswagen Board Member: Staff Acted Criminally (BBC)

Olaf Lies, a Volkswagen board member and economy minister of Lower Saxony has told Newsnight some staff acted criminally over emission cheat tests. He said the people who allowed the deception to happen or who installed the software that allowed certain models to give false emissions readings must take personal responsibility. He also said the board only found out about the problems at the last meeting. About 11 million diesel engine cars are affected by the problem. Mr Lies told the BBC: “Those people who allowed this to happen, or who made the decision to install this software – they acted criminally. They must take personal responsibility.” He said: “We only found out about the problems in the last board meeting, shortly before the media did. I want to be quite open. So we need to find out why the board wasn’t informed earlier about the problems when they were known about over a year ago in the United States.”

He said the company had no idea of the total bill to sort out the engines and cover any legal costs arising: “Huge damage has been done because millions of people have lost their faith in VW. We are surely going to have a lot of people suing for damages. We have to recall lots of cars and it has to happen really fast.” He added that the company was strong and that rebuilding trust – and ensuring the majority of the 600,000 workers at the car giant were not blamed, was its priority. He added his apology to those already made by senior company figures and said: “I’m ashamed that the people in America who bought cars with complete confidence are so disappointed.” VW is working out how to refit the software in the 11 million diesel engines involved in the emissions scandal. Seat is the latest VW brand to reveal it, too, used the emission cheat device.

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Be good to see how different legal systems have different approaches.

• Volkswagen Spain Faces Criminal Complaint Over Emissions Tests (Bloomberg)

Volkswagen AG’s three Spanish units and their chairmen are facing a criminal complaint stemming from its rigged emissions tests that accuses them of defrauding consumers and the tax authorities and damaging the environment. Manos Limpias, a public workers’ union that has pursued corruption allegations against high-profile figures in Spain including the king’s sister, filed the private suit with the National Court on Monday. The Spanish state could face a civil liability for failing to adequately supervise the automaker, according to a copy of the lawsuit seen by Bloomberg News. German prosecutors have already started a criminal probe of the car maker that will examine the role of former CEO Martin Winterkorn. Winterkorn resigned on Friday after a tumultuous week in which Europe’s biggest car manufacturer admitted to tampering with some diesel engines to cheat on U.S. emissions tests.

The complaint named Volkswagen Audi SA Chairman James Morys Muir, Volkswagen Navarra SA Chairman Ulbrich Thomas and Seat SA Chairman Francisco Javier Garcia Sanz. Volkswagen and its Seat unit have built more than 500,000 cars in Spain with the 1.6- and 2.0-liter diesel motors subject to the German investigation, Manos Limpias said in the lawsuit. Several models from Volkswagen’s other brands that are under investigation have also been sold to Spanish consumers. In addition, the German company has been claiming subsidies from the Spanish government since at least 2009 as an incentive to produce low emission cars. While Industry Ministry Jose Manuel Soria says Spain will ask Volkswagen to give back the subsidies, the government may also face a civil charges because it ordered Seat’s technical unit to conduct the emissions tests, Manos Limpias said in the document.

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“Volkswagen did not say how the planned refit would make cars with the “cheat” software comply with regulations..”

• Volkswagen To Refit Cars Affected By Emissions Scandal (Reuters)

Volkswagen said on Tuesday it will repair up to 11 million vehicles and overhaul its namesake brand following the scandal over its rigging of emissions tests. New CEO Matthias Mueller said the German carmaker would tell customers in the coming days they would need to have diesel vehicles with illegal software refitted, a move which some analysts have said could cost more than $6.5 billion. In Washington, U.S. lawmakers asked the automaker to turn over documents related to the scandal, including records concerning the development of a software program intended to defeat regulatory emissions tests. In separate letters, leading Republicans and Democrats on the House Energy and Commerce Committee requested information from both Volkswagen and the EPA as part of an investigation into the controversy.

Europe’s biggest carmaker has admitted cheating in diesel emissions tests in the US and Germany’s transport minister says it also manipulated them in Europe, where Volkswagen sells about 40% of its vehicles. The company is under huge pressure to address a crisis that has wiped more than a third off its market value, sent shock waves through the global car market and could harm Germany’s economy. “We are facing a long trudge and a lot of hard work,” Mueller told a closed-door gathering of about 1,000 top managers at Volkswagen’s Wolfsburg headquarters late on Monday. “We will only be able to make progress in steps and there will be setbacks,” he said. Volkswagen did not say how the planned refit would make cars with the “cheat” software comply with regulations, or how this might affect vehicles’ mileage or efficiency, which are important considerations for customers. It said it would submit the details to Germany’s KBA watchdog next month.

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Exactly what I was thinking listening to Obama. “We bring them democracy” has become a ridiculous line.

• Obama Re-Defines Democracy – A Country that Supports US Policy (Michael Hudson)

In his Orwellian September 28, 2015 speech to the United Nations, President Obama said that if democracy had existed in Syria, therenever would have been a revolt against Assad. By that, he meant ISIL. Wherethere is democracy, he said, there is no violence of revolution. This was his threat to promote revolution, coups and violence against any country not deemed a “democracy.” In making this hardly veiled threat, he redefined the word in the international political vocabulary. Democracy is the CIA’s overthrow of Mossedegh in Iran to install the Shah. Democracy is the overthrow of Afghanistan’s secular government by the Taliban against Russia. Democracy is the Ukrainian coup behind Yats and Poroshenko. Democracy is Pinochet. It is “our bastards,” as Lyndon Johnson said with regard to the Latin American dictators installed by U.S. foreign policy.

A century ago the word “democracy” referred to a nation whose policies were formed by elected representatives. Ever since ancient Athens, democracy was contrasted to oligarchy and aristocracy. But since the Cold War and its aftermath, that is not how U.S. politicians have used the term. When an American president uses the word “democracy,” he means a pro-American country following U.S. neoliberal policies. No matter if a country is a military dictatorship or the government was brought in by a coup (euphemized as a Color Revolution) as in Georgia or Ukraine. A “democratic” government has been re-defined simply as one supporting the Washington Consensus, NATO and the IMF. It is a government that shifts policy-making out of the hands of elected representatives to an “independent” central bank, whose policies are dictated by the oligarchy centered in Wall Street, the City of London and Frankfurt.

Given this American re-definition of the political vocabulary, when President Obama says that such countries will not suffer coups, violent revolution or terrorism, he means that countries safely within the U.S. diplomatic orbit will be free of destabilization sponsored by the U.S. State Department, Defense Department and Treasury. Countries whose voters democratically elect a government or regime that acts independently (or even that simply seeks the power to act independently of U.S. directives) will be destabilized, Syria style, Ukraine style or Chile style under General Pinochet. As Henry Kissinger said, just because a country votes in communists doesn’t mean that we have to accept it. It is the style of “color revolutions” sponsored by the National Endowment for Democracy.

In his United Nations reply, Russian President Putin warned against the “export of democratic revolution,” meaning by the United States in support of its local factotums. ISIL is armed with U.S. weapons and its soldiers were trained by U.S. armed forces. In case there was any doubt, President Obama reiterated before the United Nations that until Syrian President Assad was removed in favor of one more submissive to U.S. oil and military policy, Assad was the major enemy, not ISIL. “It is impossible to tolerate the present situation any longer,” President Putin responded. Likewise in Ukraine. “What I believe is absolutely unacceptable,” he said in his CBS interview on 60 Minutes, “is the resolution of internal political issues in the former USSR Republics, through “color revolutions,” through coup d’états, through unconstitutional removal of power. That is totally unacceptable.”

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Greece had an excellent education system for a very long time. Now that is gone too.

• Greek Crisis a Tragedy For Education System (BBC)

When considering the effects of the debt crisis on Greece, most people probably think of long queues outside banks and protests in the streets. A less visible but perhaps further reaching outcome is that Greece’s education system has become one of the most unequal in the developed world. Although education in Greece is free, public schools are suffering from spending cuts imposed as a condition of the bailout agreements. In practice, over the last 30 years it has become increasingly necessary for students to pay for expensive private tuition to pass the famously difficult Panhellenic exams required to get to university. But with unemployment rising and salaries falling, many poor and middle-class families are struggling to pay for this extra tuition.

A World Economic Forum report this month ranked Greece last of 30 advanced economies for education because of the close relationship between students’ performance and their parents’ income. And a professor of law and economics at the University of Athens warns that losing talented students from poor backgrounds is a “national catastrophe” which could hinder Greece’s long-term economic recovery. Greece’s education system was designed around the principle of equality. Article 16 of the constitution guarantees free education at all levels and university admission is decided solely by performance in the nationwide Panhellenic exams. But the low quality of some public education in Greece, and the difficulty of the Panhellenic exams, has led to a parallel education system being set up.

The majority of students in Greece attend private classes called “frontistiria” or one-to-one tuition in evenings and weekends. In 2008, the year before the crisis, families with children in upper secondary education spent more than €950m on these lessons, which represented nearly 20% of these households’ expenditure – more than any other European country. “If a student does not attend frontistirio, he is a dead man for the exams,” said Dimitra Kakampoura, a 22-year-old student who took the Panhellenic exams in 2011.

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“Banks lend to oil exploration companies based on the value of their reserves. But they only audit the value of those reserves every October. Given how much oil prices have tumbled in the past year, many analysts expect banks to greatly reduce in the next month..”

• Frackers Could Soon Face Mass Extinction (Fortune)

An analyst says one-third of the companies could be bankrupt by the end of next year. Doomsday may finally be coming to the fracking industry. Despite the big drop in oil prices in the past year, there have been relatively few bankruptcies in the energy industry. That may be about to change. James West, an energy industry analyst at ISI Evercore, says months of low activity have left many of the companies in the hydraulic-fracturing business either insolvent or close to it. He says as many as a third of the fracking companies could go bust by the end of next year. “This holiday will not be a time of cheer in the oil patch,” says West. So far oil and gas exploration companies, while cutting back somewhat, have continued to spend based on budgets set a year ago when oil prices were much higher.

But now West says the price of oil is catching up to them, and they may soon have to drastically cut back their spending on services. The catalyst is the banks. Banks lend to oil exploration companies based on the value of their reserves. But they only audit the value of those reserves every October. Given how much oil prices have tumbled in the past year, many analysts expect banks to greatly reduce in the next month how much they are willing to lend to oil and gas companies. Regulators, worried banks may face losses, have recently been pressuring banks to cut back their lending to oil and gas companies. On Friday, credit ratings firm Standard & Poors reported that its distressed ratio, which measures the%age of corporate borrowers that investors appear nervous may not be able to pay back their debt, had reached the highest level since 2011. The oil and gas sector accounted for the largest number of the distressed borrowers, 95 out of 270.

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Clueless Kiwis.

• Chinese Buyers Holding Back On ‘High-End’ New Zealand Property (NZ Herald)

While some Chinese buyers are holding back on buying “high-end” property in Auckland, there is still demand for houses in the medium and lower end of the market, a Chinese-based real estate website says. Juwai.com hasn’t yet finalised its numbers for the third quarter of this year but still expects to see growth. It also predicts a massive increase in overseas investment from Chinese buyers of international property over the next few years. The Auckland housing market is cooling slightly and the boss of the city’s biggest real estate company has said Chinese property investors are disappearing from the auction room. Peter Thompson, of Barfoot and Thompson, attributes the the drop off to financial instability in China. “There are a lot less Chinese in the auction room at the moment and at the open homes,” he told the Herald on Monday.

“The market has changed and some of that is the Chinese buyers. There are more requirements in getting money out of China now and that is having an impact.” Juwai.com’s chief executive Simon Henry said he’d noticed a slow-down at the expensive end of the market. “We have some high-end buyers holding back since China announced a tightening of enforcement on the export of capital. “We haven’t yet crunched the numbers on the third quarter, but we believe they will still show growth over the second quarter,” Mr Henry said. “Mid-market and lower priced properties, like those bought for students, are still in demand.” Changes in the way Chinese investors can export capital were predicted to lead to a huge swell in money flooding into New Zealand, which Mr Henry said was a “good thing”. “It will lead to more than $100 million of new investment in New Zealand property over the medium to long term, as well as new investment in local business and industry.”

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Flip flopping with people’s lives.

• Berlin To Curb Refugees As Merkel Faces Backlash (FT)

Berlin on Tuesday agreed measures aimed at curbing an unprecedented surge in migrants, including cuts to cash payments, as a backlash grew over the German government’s handling of the refugee crisis. The new laws are aimed at lifting some of the pressures on overworked local officials and reassuring voters that the government is in control of the migrant problem. Berlin wants the laws to take effect as soon as November. Chancellor Angela Merkel has come under mounting pressure, including from within her own CDU/CSU coalition, since she pledged to set “no upper limit” on the right to asylum and promised to accept all refugees from Syria. Officials expects 800,000 refugees this year, four times more than 2014.

In a surprise development, Joachim Gauck, German president, who is widely viewed as a liberal, on Sunday launched a thinly veiled attack on Ms Merkel’s handling of the crisis, saying: “Our reception capacity is limited even when it has not yet been worked out where these limits lie.” Cash handouts of €143 a month for a single person are seen as making Germany more desirable for migrants than other European states. Refugees will instead receive non-cash benefits, such as food vouchers. Cash payments for living expenses will largely be stopped for asylum-seekers living in official reception centres.

Berlin will also add Kosovo, Albania and Montenegro to a list of countries where would-be refugees can be safely returned in an attempt to staunch inflows of economic migrants from the western Balkans. Failed asylum-seekers will face more rapid removal procedures and big cuts in financial support. However, successful applicants will have quicker access to language courses to improve integration into society and the jobs market. Berlin pledged to double its refugee-linked support for regional and local authorities to 2 billion euros this year, rising to about €4 billion in 2016, assuming refugee inflows of 800,000 annually.

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There are good people everywhere. They’re just not in charge.

• Risking Arrest, Thousands Of Hungarians Offer Help To Refugees (NPR)

Driving in rural, southern Hungary, especially at night, you’re likely to see people emerging from dark forests along the side of the road. They trudge along the highway’s narrow shoulder and sometimes flag down passing cars, asking for help. They’re migrants and refugees who’ve entered Hungary by the tens of thousands in recent months, mostly en route to Germany and other northern European countries. But it’s illegal for civilians in Hungary to help them get there. Hungarian law prohibits offering rides — even for free — to people who’ve entered the country illegally and without a visa. Another law grants Hungarian police and military extraordinary powers to search private homes if they suspect someone of harboring illegal migrants.

The laws, passed in stages earlier this year, target human traffickers, and have led to a few high-profile arrests. Back in August, it was in Hungary that 71 Syrian refugees were loaded into a northbound truck. They were found suffocated to death in the same truck, on the side of a highway in Austria, on Aug. 28. Hungarian police arrested four alleged smugglers. But the laws are also making well-intentioned volunteers think twice about helping — because they, too, could be prosecuted, fined or jailed. At a Migration Aid warehouse in downtown Budapest, volunteers stockpile crates of fruit and sleeping bags for refugees. Dozens of Hungarians stop by to help, including Gyorgy Goldschmit, who offers up his own home. His wife and child are going out of town for a few weeks and he says he has room for another family, if needed.

“My family is not going to be there, and I will be there – so it’s obvious that someone could come,” Goldschmit says. But Migration Aid can’t arrange it. Its directors understand Hungarian law. “Maybe they cannot help like this because that would be considered as helping illegally or trafficking,” Goldschmit says. “But I don’t care so much.” Like many Hungarians, Goldschmit is not afraid of prosecution. Thousands are helping. But it’s unclear how many more are dissuaded by these laws. It’s also unclear how aggressively the laws are being enforced. The highest-profile case so far involved a Hungarian man arrested in April after using a local ride-share website, through which fuel costs are shared, to give lifts to refugees.

He was acquitted after a months-long legal battle, but his case served as a well-publicized warning to anyone thinking of transporting migrants. “Basically, if I drive you across [the country] and you don’t have a visa, then I’m liable criminally,” says Marta Pardavi, a human rights lawyer with the Budapest branch of the Helsinki Committee. “We have advised volunteers doing this that there is a risk involved — the risk of a criminal procedure, of having to go to interrogations — and I think that risk is very real.”

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Debt Rattle August 30 2015

Aug 302015
 
 August 30, 2015  Posted by at 10:41 am Finance Tagged with: , , , , , , , , ,  Comments Off on Debt Rattle August 30 2015


Russell Lee Hammond Ranch general store, Chicot, Arkansas Jan 1939

• Why We Need To Lie To Ourselves About The State Of The Economy (Satyajit Das)
• Fed, ECB, BOE Officials All Say They See Inflation Rising (Bloomberg)
• Central Banks Can’t Save Markets From A Crash, And Shouldn’t Try (Guardian)
• On Second Thought, China Slowdown Will Hit Global-Growth Outlook (Bloomberg)
• How To Make Sense Of China (Elizabeth C. Economy)
• China Falters, And The Global Economy Is Forced To Adapt (NY Times)
• China Premier Li Says No Basis for Yuan’s Continued Depreciation (Bloomberg)
• For China, a Plunge and a Reckoning (WSJ)
• How Western Capitalism Laid China Low (Pettifor)
• Market Turmoil Means Capitalism Faces Systematic Crisis (Sputnik)
• We Are All Preppers Now (Mises Inst.)
• IMF’s Lagarde Says Restructuring Should Suffice For Greek Debt (Reuters)
• How 340.75 Drachmas Became 1 Euro (Yannis Palaiologos)
• UK Property Sales Down 15%, But Prices Are Up (BBC)
• The Evolution of America’s Energy Supply -1776 – 2014 (VC)
• As Tragedies Shock Europe, A Bigger Refugee Crisis Looms In Middle East (WaPo)

“For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few..”

• Why We Need To Lie To Ourselves About The State Of The Economy (Satyajit Das)

Like the characters in Samuel Beckett’s Waiting for Godot, the world awaits the return of wealth and prosperity. But the global economy may be entering a period of stagnation. Over the last 35 years, the economic growth necessary to increase living standards, increase wealth and manage growing inequality has been based increasingly on rising borrowings and financial rather than real engineering. There was reliance on debt-driven consumption. It resulted in global trade and investment imbalances, such as that between China and the US or Germany and the rest of Europe. Everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.

Citizens demanded and governments allowed the build-up of retirement and healthcare entitlements as well as public services to win or maintain office. The commitments were rarely fully funded by taxes or other provisions. The 2008 global financial crisis was a warning of the unstable nature of these arrangements. But there has been no meaningful change. Since 2007, global debt has grown by US$57 trillion, or 17% of the world’s GDP. In many countries, debt has reached unsustainable levels, and it is unclear how or when it is to be reduced without defaults that would wipe out large amounts of savings. Imbalances remain. Entitlement reform has proved politically difficult. Financial institutions and activity dominate many economies. The official policy is “extend and pretend”, whereby everybody conspires to ignore the underlying problem, cover it up, or devise deferral strategies to kick the can down the road.

The assumption was that government spending, lower interest rates and supplying abundant cash to the money markets would create growth. While the measures did stabilise the economy, they did not lead to a full recovery. Instead, they set off dangerous asset price bubbles in shares, bonds, real estate and even fine arts and collectibles. Economic problems are now compounded by lower population growth and ageing populations; slower increases in productivity and innovation; looming shortages of critical resources, such as water, food and energy; and man-made climate change and extreme weather conditions.

Slower growth in international trade and capital flows is another retardant. Emerging markets, such as China, that have benefited from and recently supported growth are slowing. Rising inequality affects economic activity. For most people, the effect of these problems is unemployment, reduced job security, the deskilling of many professions and stagnant incomes. Home ownership is increasingly out of reach for many. Retirement may become a luxury for all but a few, reflecting increasing difficulty in building sufficient savings. In effect, living standards will decline. Future generations will bear the bulk of the cost as they are left to tackle the unresolved problems of their forebears.

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Empty rethorical lies.

• Fed, ECB, BOE Officials All Say They See Inflation Rising (Bloomberg)

Stronger growth will pull inflation higher in the U.S. and Europe, according to three top central bankers who voiced confidence that their regions will escape from headwinds that are keeping inflation too low. Fed Vice Chairman Stanley Fischer joined ECB Vice President Vitor Constancio and BoE Governor Mark Carney Saturday on a panel at the Kansas City Fed’s annual retreat in Jackson Hole, Wyoming, dedicated to discussing inflation dynamics. Their optimism has not been shared up until now by investors, trading in inflation-protected bonds shows. “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further,” Fischer said in his prepared remarks.

“With inflation low, we can probably remove accommodation at a gradual pace,” Fischer said. “Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.” While Fischer has left open the option of an interest-rate increase when policy makers meet next month, he didn’t express a preference for acting that soon. “I do not plan to upset your rational expectation that I cannot tell you what decision the Fed will reach by Sept. 17,” he told the symposium Saturday. Price increases in the U.S. and Europe have been running well below levels targeted by the central banks, where officials are debating what slower Chinese growth and weaker commodity prices could mean for future inflation.

While U.S. officials are weighing the timing of their first interest-rate increase since 2006, and the Bank of England may tighten in early 2016, the ECB has heard calls to extend its quantitative easing program to provide more protection against potential deflation. “The link between inflation and real activity appears to have strengthened in the euro area recently,” the ECB’s Constancio said in a paper delivered at Jackson Hole. “Provided our policies are able to significantly reduce the output gap, we can rely on a material effect to help bring the inflation rate closer to target.” Investors may not share this optimism. 5-year, 5-year inflation swaps in the euro area – which reflect expectations for the five-year path of inflation five years from now – show that market-based inflation expectations slid to about 1.65%in August from about 1.85% at the beginning of the month. That’s almost as low as when the ECB started its quantitative easing program in March.

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But who says they’re trying? I often think they’re trying to cause crashes instead.

• Central Banks Can’t Save Markets From A Crash, And Shouldn’t Try (Guardian)

The meeting of the world’s most important central bankers in Jackson Hole, Wyoming, this weekend only confirmed the need for Britain, Japan, the eurozone and the US to keep monetary policy loose. Yet the palliative offered by the Fed is akin to a parent soothing fears with another round of ice-creams despite expanding waistlines and warnings from the dentist and the doctor. According to some City analysts, the stock markets are pumped with so much cheap credit that a crash is just around the corner. And they worry that when that crash comes, the central banks are all out of moves to prevent the aftershocks from causing a broader collapse.

Since 2008 the Fed has pumped around $4.5 trillion into the financial system. The Bank of England stopped at £375bn. The Bank of Japan is still adding to its post-crash stimulus with around $700bn a year and the ECB will have matched its cousin in Tokyo by the end of the year. In each case, the central bank has adopted quantitative easing, which involves buying government debt to drive up its price. A higher price lowers the returns and encourages investors to go elsewhere in search of gains. It has meant a big shift in the portfolios of fund managers in favour of shares. Apart from a few blips due to the Greek crisis, stock markets have boomed. This summer, the FTSE 100 soared past 2008 levels to top its 1999 peak.

But China, which has borrowed heavily to keep its economy moving, is running out of steam. Beijing has said it does not want to encourage another borrowing boom. But to prevent a crash, it is doing just that. In the last two weeks it has cut interest rates and loosened borrowing limits. It has even invested directly in the market, buying the shares of smaller companies. So we face the shocking prospect of central bankers, in thrall to stock market gyrations, making the world a more unstable place with promises of yet more cheap credit.

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Disregard everything Bloomberg has published on the issue over the past two weeks?!

• On Second Thought, China Slowdown Will Hit Global-Growth Outlook (Bloomberg)

China’s deepening struggles are starting to make a bigger dent in the global economic outlook. Moody’s Investors Service on Friday cut its 2016 growth forecast in Group of 20 economies to 2.8%, down 0.3 percentage point from the company’s call less than two weeks ago. China is projected to grow 6.3% in 2016, down from 6.5% previously, the credit-rating company said in a report. Citigroup Inc. last week pared its projection for world growth in 2016 to 3.1% from 3.3%, the third straight time the bank has cut the forecast. Recent Chinese data including numbers on credit expansion and fixed-asset investment suggest a sharper slowdown this quarter than Moody’s previously judged, while Citigroup said the worsening outlook was driven by “significant” downgrades for China, the euro area, Japan and several other major countries.

“We’re seeing evidence that the slowdown is broader than expected” in China, said Marie Diron, a London-based senior vice president at Moody’s and one of the report’s authors. “It’s long been clear that there’s a slowdown in the manufacturing and construction sector, but the service sector was more resilient. That’s still the case, but we’re seeing some signs of weakness in the labor market.” Efforts to boost growth by the People’s Bank of China, which eased its main policy rate this week, will only partly offset the slowdown, Moody’s said in the research report. Moody’s said it cut its global projection because of “information that has become available” since the Aug. 18 publication of its previous forecast. In addition to China, Moody’s lowered outlooks for nations including Brazil and Russia.

The depreciation of the yuan will probably be “fairly modest” in coming months, meaning the world’s second-largest economy won’t get much of a boost from a cheaper currency, Mark Schofield at Citigroup Global Markets, wrote in an Aug. 21 report. China shocked markets on Aug. 11 by devaluing the yuan and aligning its exchange-rate policy more with market forces. The currency is down 2.8% against the dollar this month, while the Shanghai Composite Index of stocks has plunged 12%. “We continue to believe that the greatest risks to our growth forecasts remain to the downside,” Schofield wrote. Actual growth is “probably even lower” because of “likely mis-measurement in China’s official data,” he wrote. Even with the weaker outlook, Moody’s dismissed the impact of China’s stock-market rout, saying it happened after a “long period of price increases” and will have limited effects on consumer spending and financial-industry profit.

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Newsweek finds this fit to print.

• How To Make Sense Of China (Elizabeth C. Economy)

Over the past month, there has been a lot of “China drama.” The volatility in the Chinese stock market, the yuan devaluation and now the Tianjin warehouse explosion have all raised China chatter to a new level of anxiety. Some of the anxiety is understandable. These events have real consequences—above all for the Chinese people. At the urging of the Chinese government, tens of millions of Chinese moved to stake their fortunes not on real estate but on the stock market—the most unfortunate used their real estate as leverage to invest in the market and are now desperate for some good news. The Tianjin warehouse explosion has thus far left 121 Chinese dead, more than seven hundred injured and over fifty still missing.

Globally, the yuan devaluation has triggered a rate rethink by central bankers in Europe and the United States and the stock market slide has contributed to steep drops in Asian and U.S. markets. Events such as these in any country would garner international attention. In the case of China, however, the noise around such events is amplified by the absence of three mitigating factors:

Transparency. A lack of transparency in China compounds the challenge of understanding what is going on. What, for example, is behind China’s devaluation of the yuan? Is it part of Beijing’s bid to push forward on its economic reforms by making the currency more responsive to the market? Is it an effort to persuade the International Monetary Fund that the yuan should become part of its basket of currencies before Beijing has to wait another five years for its currency to be considered? Is it an effort to prop up China’s ever-declining export numbers? Or is it a confluence of all three?

Context. While the human toll inflicted by the Tianjin warehouse explosion was devastating, no one should be surprised by the disaster itself or the political aftermath. The pattern of Chinese behavior—including the corrupt environmental impact assessment system that allowed for the placement of the factory so close to people’s residences, the lack of knowledge of what precisely the warehouse stored, the generosity of the Chinese people trying to help those affected and the attention paid by the Chinese government to assigning blame and shutting down information transmission and popular commentary via the Internet—is one that repeats itself frequently.

Perspective. Drama surrounding China is also heightened by the tendency of outside observers to lose a bit of perspective. The media, as well as China analysts—and those who play them on TV— are rewarded for bold statements and predictions. I looked back at what people were saying about the Chinese stock market at the end of 2014 and early 2015 when the market was surging. At that time, unsurprisingly, there was a lot of triumphalism punctuated by a few dark warnings. The Economist, for example, produced a piece, “Super-bull on the rampage,” that focused 95% of its attention on all the excitement the stock market was generating, with only 5% at the end mentioning some of the potential weaknesses underpinning the rise in the market.

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Everyone was part of the Ponzi.

• China Falters, And The Global Economy Is Forced To Adapt (NY Times)

The commodities giant BHP Billiton spent heavily for years, mining iron ore across Australia, digging for copper in Chile, and pumping oil off the coast of Trinidad. The company could be confident in its direction as commodities orders surged from its biggest and best customer, China. Now, BHP is pulling back, faced with a slowing Chinese economy that will no longer be the same dominant force in commodities. Profit is falling and the company is cutting its investment spending budget by more than two-thirds. China’s rapid growth over the last decade reshaped the world economy, creating a powerful driver of corporate strategies, financial markets and geopolitical decisions. China seemed to have a one-way trajectory, momentum that would provide a steady source of profit and capital.

But deepening economic fears about China, which culminated this week in a global market rout, are now forcing a broad rethinking of the conventional wisdom. Even as markets show signs of stabilizing, the resulting shock waves could be lasting, by exposing a new reality that China is no longer a sure bet. China, while still a large and pervasive presence in the global economy, is now exporting uncertainty around the world with the potential for choppier growth and volatile swings. The tectonic shift is forcing a gut check in industries that have built their strategies and plotted their profits around China’s rise. Industrial and commodity multinationals face the most pressing concerns, as they scramble to stem the profit slide from weaker consumption.

Caterpillar cut back factory production, with industry sales of construction equipment in China dropping by half in the first six months of the year. Smartphone makers, automobile manufacturers and retailers wonder about the staying power of Chinese buyers, even if it is not shaking their bottom line at this point. General Motors and Ford factories have been shipping fewer cars to Chinese dealerships this summer. It is not just companies reassessing their assumptions. Russia had been turning to China to fill the financial gap left by low oil prices and Western sanctions. Venezuela, Nigeria and Ukraine have been heavily dependent on investments and low-cost loans from China.

The pain has been particularly acute for Brazil. The country is already faltering, as weaker Chinese imports of minerals and soybeans have jolted all of Latin America. The uncertainty over China could limit the maneuvering room for officials to address the sluggish Brazilian economy at a time when resentment is festering over proposed austerity measures.

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After next Thursday’s military parade things may change.

• China Premier Li Says No Basis for Yuan’s Continued Depreciation (Bloomberg)

Chinese Premier Li Keqiang said there was no basis for a continued depreciation of the yuan after the central bank allowed the currency to devalue 2.8% this month. The yuan can remain “basically” stable on a “reasonable and equilibrium level,” said Li, according to a statement posted on the State Council’s website Saturday. Li made the comments at a state council meeting on Friday. The assurances came after the central bank on Aug. 25 cut interest rates for the fifth time since November and lowered the amount of cash banks must set aside to stem the biggest stock-market rout since 1996. Deflation risks, over-capacity and a debt overhang remain a cloud over the Chinese economy, which is forecast for its slowest expansion since 1990.

China will continue to carry out proactive fiscal policy and prudent monetary policy and will use “more precise” measures to cope with downward pressure on the economy, said Li in the statement. The government will prevent regional and systematic risks, according to the statement. Policy makers want to stabilize Chinese shares before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, two people familiar with the matter, who asked not to be identified because the intervention wasn’t publicly announced, said Thursday.

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Long good read. Still too soft though.

• For China, a Plunge and a Reckoning (WSJ)

As China’s stock markets started nose-diving, the government almost immediately intervened, forbidding state-owned enterprises to sell shares, buying hundreds of billions of dollars worth of stocks and lowering interest rates to stimulate buying. It was a fatal decision: Their interventions immediately turned the markets into an institution they owned. Henceforth, the party’s reputation would rise or fall with those markets. And as the markets roil, as they undoubtedly will, the way that ordinary Chinese citizens see their leaders is likely to change significantly. The plunge was all the more unnerving because it belied the party leadership’s conceit that their superior formula of governance could safely guide the economy through just such cyclical shocks.

This pretension had not only helped create a mythology of can-do omnipotence and invincibility around party leaders but also helped silence foreign critics of the slow pace of economic reform and the complete absence of political reform. Worse, the market crash came alongside a rash of other unsettling news. Earlier this month, a key gauge of China’s nationwide manufacturing activity showed the lowest level in 77 months. Steel production and consumption are both notably off. Exports slid sharply in July. The renminbi has been devalued.

And on Aug. 12, a chemical warehouse serving the port city of Tianjin blew up in a devastating explosion that incinerated whole lots full of export vehicles, demolished thousands of apartments, killed some 140 people and spewed untold quantities of toxic chemicals into densely populated neighborhoods. The party suddenly no longer seemed infallible. For China’s leaders, the most profound problem with this string of events isn’t simply the monetary loss or the body count but the overall psychological effect. Because Mr. Xi’s China is such a brittle, tightly wound society, it is especially vulnerable to such shocks. Moreover, because the party leadership and central government purport to control so many aspects of Chinese life—from economics and financial markets to culture and politics—they get blamed first whenever anything goes awry.

Since China today already has a serious trust deficit, blame can be instant and uncompromising. And China’s leaders have been laid low by their own venture, not Western gunboats. The debacle was nothing that could be convincingly blamed on the outside world; it was made in China. The party would have been better off to have just left the stock markets alone. Party leaders could not have tangled with a more free-willed and insubordinate jousting partner. Markets answer to their own value-driven drummers. Unlike dissident Nobel Peace Prize laureates, who can always be silenced or jailed, there is no obvious way to bring a market to heel—something the party evidently remains ill-equipped to understand.

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Debt done it.

• How Western Capitalism Laid China Low (Pettifor)

After two days of trouble and strife in global stock markets, the Federal Reserve’s New York President William Dudley said in remarks to reporters that a September interest rate hike seemed “less compelling” now than in recent weeks. These two words alone calmed global financial markets, and pushed up the price of oil. So everything’s going to be all right then? That is what some would have you believe. “Relax. Its just a correction” say the analysts. “The stock market always goes up and up and up. Hang on in there.” However, I do worry. Where there’s volatility and instability, the causes are ultimately fundamental. Given this week’s events what can they be? Is it all to do with China?

I doubt it. When the governors of the People’s Bank of China announced a cut in interest rates – stock markets continued to fall. When a Fed governor uttered two words off the cuff – markets rallied. So when looking for a cause we need to look west, not east. Most agree that the panic was sparked by a slowdown in China. The question then becomes: why is China slowing down? Some put it down to China’s credit binge, and the rise in debt hobbling local governments and property developers. Demographic change is another. Others believe that China’s extraordinary investment levels will now dive lower.

I don’t buy these analyses as causal. Instead I see them as consequential, and would point the finger at the following: first an overhang of global debt, largely in Anglo-American economies ($57trillion has been added since 2009). Second, the deficiency in global demand for goods and services caused by austerity, low levels of investment and wage repression. Third, the glut of unsold Chinese goods (e.g. cars and rubber tyres) caused by falling demand for these goods, and resulting in falls in prices (disinflation or deflation). The deficiency of demand and resulting disinflation or deflation originates, I would argue, in the United States, the world’s biggest consumer but also one in which private debt levels remain high, and wages remain repressed.

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“Capitalism is dead. The markets have become too big to fail..”

• Market Turmoil Means Capitalism Faces Systematic Crisis (Sputnik)

The volatility sweeping world markets over the past week is a sign an impending global economic crisis and the imperfections of capitalism run amok, Trends Research Institute head Gerald Celente told Sputnik. “Capitalism is dead. The markets have become too big to fail,” Celente said on Friday. “It’s a rigged game.” Celente, who is also the publisher of Trends Journal, noted that markets behave more like a casino than a free market system. “It is like a casino that plays with two different sets of cards and in one of them it keeps putting its own new wild cards and jokers in the deck,” Celente, who is also the head of Trends Research Institute, continued. Stock market managers and major financial interests were rigging the market to protect their institutions and profits, Celente argued.

The expert said it was false to blame China for setting off the chain reaction through the volatility on the Shanghai stock exchange. He argued instead this was a symptom of the underlying problems, not their cause. “The US and Europeans are buying less products, so China has to export less and therefore its demand for raw materials from developing countries around the world falls,” he pointed out. “This is a response to global stagnation,” he argued. The US, China, Japan and other countries have tried to stave off multiple crises by printing vast sums of money through QE and other monetary policies, but they have been unable to jump-start growth, Celente observed. “This is a global crisis. It is a Ponzi scheme,” he said. He argued the global financial system and central banks tried to resolve the crash of 2008 by printing cheap money and the cracks in that policy are now revealing themselves.

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“We were close enough in 2008 and what’s coming is on 20 times that scale.”

• We Are All Preppers Now (Mises Inst.)

Damian McBride is the former head of communications at the British treasury and former special adviser to Gordon Brown, erstwhile Prime Minister of the U.K. Yesterday he tweeted some surprising advice in response to the plunge in global equities markets:

Advice on the looming crash, No. 1: get hard cash in a safe place now; don’t assume banks & cashpoints will be open, or bank cards will work.

Crash advice No. 2: do you have enough bottled water, tinned goods & other essentials at home to live a month indoors? If not, get shopping.

Crash advice No. 3: agree a rally point with your loved ones in case transport and communication gets cut off; somewhere you can all head to.

Evidently, McBride interprets the wipe-out of over $3 trillion in total global market cap during the three-day rout as a prelude to a much broader and deeper financial crash that will precipitate civil unrest. According to McBride,

“We were close enough in 2008 and what’s coming is on 20 times that scale.”

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Lagarde drops the ball several times in just a few sentences. Let’s hope her minions call her on it.

• IMF’s Lagarde Says Restructuring Should Suffice For Greek Debt (Reuters)

A form of debt restructuring rather than outright forgiveness should enable Greece to handle its “unviable” debt burden, the head of the IMF was quoted as telling a Swiss newspaper. The IMF has yet to make clear if it will participate in the third €86 billion international bailout that Greece signed up to in early August, having argued in favor of a partial writedown of a debt burden it considers unsustainable in its current form. Greece’s euro zone creditors, notably Germany, have ruled out a writedown but are willing to consider other forms of restructuring such as a lengthening maturities. Asked about those differences, IMF Managing Director Christine Lagarde told Le Temps: “The debate on cancelling the debt has never been open I don’t think it is necessary to open it if things go well…

“We are talking about extending maturities, reducing rates, (making) exemptions for a certain period of time. We are not speaking about cancelling debt.” The interview made no mention of whether the IMF will take part in the new bailout, which Lagarde has previously said it will make a decision on by October. Turning to China, Lagarde said she expected the country’s economic growth rate to remain close to previous estimates even if some sort of slowdown was inevitable after its rapid expansion. China devalued its yuan currency this month after exports tumbled in July, spooking global markets worried that a main driver of growth was running out of steam. “The slowdown was predictable, predicted, unavoidable,” Lagarde was quoted as saying. “We expect that China will have a growth rate of 6.8%. It may be a little less.” The IMF did not believe growth would fall to 4 or 4.5%, as some foresaw.

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Nice little history lesson.

• How 340.75 Drachmas Became 1 Euro (Yannis Palaiologos)

It was Saturday, March 14, 1998, when Theodoros Pangalos traveled to Edinburgh for an informal council of European Union foreign ministers. The top item on the agenda was negotiations for the accession into the bloc of 11 new candidate states, including Cyprus. Before he entered the meeting, Greek correspondents asked Pangalos whether Athens would resist pressure to link Cyprus’s EU accession to the progress of reunification talks. Once the meeting ended and that issue was resolved, to the benefit of both Greek and Cypriot interests, Pangalos was blindsided by a barrage of questions on an issue he knew nothing about: News has leaked from Brussels of the devaluation of the drachma and its entry into the Exchange Rate Mechanism (ERM).

The fact that the Greek foreign minister had not been briefed on this development is indicative of the government’s secrecy, aimed at thwarting speculation. Five years earlier, when Greece had been on the brink of a major exchange rate crisis, the ERM accession would have seemed impossible to achieve. Greece, however, had managed to overshoot the targets of the revised Convergence Program over four consecutive years from 1994 to 1997 both in the area of growth and in its fiscal deficit, which was reduced from 13.6% of gross domestic product in 1993 to 4% of GDP in 1997. Inflation dropped from 14.1% in 1993 to 9% in 1995, down to single digits for the first time since 1972, and then to 5.6% in 1997.

Prime Minister Costas Simitis had set a goal for himself to get Greece into the Economic and Monetary Union by 2001 at the latest – two years after the other states but before the euro was introduced in physical form. The former premier tells Kathimerini he expressed “our determination for accession to the euro” in all of his first meetings with the European Union heavyweights – Germany’s Helmut Kohl, France’s Jacques Chirac, Italy’s Romano Prodi and the UK’s John Major. While they all appeared positively inclined initially, they stressed that the Greek economy needed to be adequately prepared for such an important step.

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The new logic of the marketplace.

• UK Property Sales Down 15%, But Prices Are Up (BBC)

The number of homes being sold in England and Wales has fallen significantly, according to figures from the Land Registry. In May this year, there were 65,619 transactions in total, a 15% fall on the same month in 2014. However, prices in some property hotspots are still rising by up to 13% a year, due to lack of supply. The number of homes being sold for more than a million pounds dropped dramatically – down by 21%. The Land Registry figures include cash sales, as well as properties bought with mortgages. Some experts have welcomed what they see as a cooling of the market.

“Normality has returned to the market, with the panic that has driven it in the past no longer present,” said Guy Meacock, head of the London office of buying agency Prime Purchase. “It is more level and sensible, which is good news for buyers.” However, the fall in transactions appears to be putting further pressure on house prices. Earlier this month, the Royal Institution of Chartered Surveyors (Rics) reported that the number of homes for sale was at a record low. As a result it said demand was outstripping supply, and prices were likely to rise as a result. The Land Registry has already reported that house prices in England and Wales rose by 4.6% in the year to July 2015.

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Not terribly innovative, but nice graphics.

• The Evolution of America’s Energy Supply -1776 – 2014 (VC)

The Energy Information Administration (EIA) recently released data on the history of America’s energy supply, sorted by the share of each energy source. We’ve taken that data to create the chart associated with today’s post. The early settlers to North America relied on organic materials on the surface of land for the vast majority of their energy needs. Wood, brush, and other biomass fuels were burned to warm homes, and eventually to power steam engines. Small amounts of coal were found in riverbeds and other such outcrops, but only local homes in the vicinity of these deposits were able to take advantage of it for household warmth. During the Industrial Revolution, it was the invention of the first coal-powered, commercially practical locomotives that turned the tide.

Although wood would still be used in the majority of locomotives until 1870, the transition to fossil fuels had begun. Coke, a product of heating certain types of coal, replaced wood charcoal as the fuel for iron blast furnaces in 1875. Thomas Edison built the first practical coal-fired electric generating station in 1882, which supplied electricity to some residents in New York City. It was just after this time in the 1910s that the United States would be the largest coal producer in the world with 750,000 miners and blasting 550 million tons of coal a year. The invention of the internal combustion engine and the development of new electrical technologies, including those developed by people like Thomas Edison and Nikola Tesla, were the first steps towards today’s modern power landscape.

Fuels such as petroleum and natural gas became very useful, and the first mass-scale hydroelectric stations were built such as Hoover Dam, which opened in 1936. The discovery and advancement of nuclear technology led to the first nuclear submarine in 1954, and the first commercial nuclear power plant in the United States in Pennsylvania in 1957. In a relatively short period of time, nuclear would have a profound effect on energy supply, and it today 99 nuclear reactors account for 20% of all electricity generated in the United States. In more recent decades, scientists found that the current energy mix is not ideal from an environmental perspective. Advancements in renewable energy solutions such as solar, wind, and geothermal were made, helping set up a potential energy revolution.

Battery technology, a key challenge for many years, has began to catch up to allow us to store larger amounts of energy when the sun isn’t shining or the wind isn’t blowing. Companies like Tesla are spending billions of dollars on battery megafactories that will have a great impact on our energy use. Today, the United States gets the majority of its energy from fossil fuels, though that percentage is slowly decreasing. While oil is still the primary fuel of choice for transportation, it now only generates 1% of the country’s electricity through power plants. Natural gas has also taken on a bigger role over time, because it is perceived as being cleaner than oil and coal. Today, in 2015, wind and solar power have generated 5% and 1% of total electricity respectively. Hydro generates 7%.

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“We are only alive because we are not dead.”

• As Tragedies Shock Europe, A Bigger Refugee Crisis Looms In Middle East (WaPo)

While the world’s attention is fixed on the tens of thousands of Syrian refugees swarming into Europe, a potentially far more profound crisis is unfolding in the countries of the Middle East that have borne the brunt of the world’s failure to resolve the Syrian war. Those reaching Europe represent a small percentage of the 4 million Syrians who have fled into Lebanon, Jordan, Turkey and Iraq, making Syria the biggest single source of refugees in the world and the worst humanitarian emergency in more than four decades. As the fighting grinds into a fifth year, the realization is dawning on aid agencies, the countries hosting the refugees and the Syrians themselves that most won’t be going home anytime soon, presenting the international community with a long-term crisis that it is ill-equipped to address and that could prove deeply destabilizing, for the region and the wider world.

The failure is first and foremost one of diplomacy, said António Guterres, the U.N. High Commissioner for Refugees. The conflict has left at least 250,000 people dead in the strategic heart of the Middle East and displaced more than 11 million overall, yet there is still no peace process, no discernible solution and no end in sight. Now, the humanitarian effort is failing, too, ground down by dwindling interest, falling donations and spiraling needs. The United Nations has received less than half the amount it said was needed to care for the refugees over the past four years. Aid is being cut and programs are being suspended at the very moment when those who left Syria in haste, expecting they soon would go home, are running out of savings and wearing out the welcome they initially received.

“It is a tragedy without parallel in the recent past,” Guterres said in an interview, warning that millions could eventually end up without the help they need to stay alive. “There are many battles being won,” he added. “Unfortunately, the number of battles being lost is more.” It is a crisis whose true cost has yet to be realized. Helpless, destitute refugees are strewn around the cities, towns and farms of the Middle East, a highly visible reminder of the world’s neglect. They throng the streets of Beirut, Istanbul, Amman and towns and villages in between, selling Kleenex or roses or simply begging for change. Mothers clutching children sleep on traffic circles, under bridges, in parks and in the doorways of shops.

Families camp out on farmland in shacks made of plastic sheeting, planks of wood and salvaged billboards advertising restaurants, movies, apartments and other trappings of lives they may never lead again. “This is not a life,” said Jalimah Mahmoud, 53, who lives on handouts with her 7-year-old granddaughter in Al-Minya, a settlement of crudely constructed tents alongside the coastal highway in northern Lebanon. “We are only alive because we are not dead.”

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Debt Rattle August 24 2015

Aug 242015
 
 August 24, 2015  Posted by at 11:54 am Finance Tagged with: , , , , , , , ,  4 Responses »


Dorothea Lange Rear window tenement dwelling, 133 Avenue D, NYC June 1936

• Global Selloff Deepens as Stocks Sink With Oil (Bloomberg)
• Global Bloodbath Sparks Financial Crisis Fears (News.com.au)
• A Sell-Off Of Epic Proportions Spreads Further (FT)
• Commodities Slump to 16-Year Low as China Slowdown Roils Markets (Bloomberg)
• China Poised to Raise Banks’ Liquidity to Boost Lending (WSJ)
• China’s One-Year Bonds Decline in Sign of Tightening Liquidity (Bloomberg)
• Is The Game Up For China’s Much Emulated Growth Model? (Ghosh)
• Chinese Pension Fund ‘Allowed’ To Invest In Stock Market (BBC)
• Angry Investors Capture Head Of China Metals Exchange (FT)
• Hong Kong Can’t Escape the Turmoil Next Door (Pesek)
• Central Banks Have Become A Corrupting Force (Roberts and Kranzler)
• The Fed Is Looking at a Very Different Dollar Than Wall Street (Bloomberg)
• It’s Time To Lay Siege To The Robber Barons Of High Finance (Ben Chu)
• Bank Litigation Costs Hit $260 Billion With $65 Billion More To Come (FT)
• Brazil’s Scandal Takes Another Toxic Turn (Bloomberg)
• EU Border Agency Frontex To Boost Patrols In Aegean To Halt Migrants (Kath.)
• Germany Shames EU for Failure to Shoulder Refugee Surge

No emperor AND no clothes.

• Global Selloff Deepens as Stocks Sink With Oil (Bloomberg)

The global selloff in riskier assets deepened, spurring the biggest drop in Asian shares since 2011 and sending emerging-market currencies to the weakest levels on record. U.S. 10-year yields dropped below 2%. Commodity prices sank to a 16-year low, while credit risk in Asia increased to the highest since March 2014. The yen rallied and government bonds rose as investors sought haven assets. China’s Shanghai Composite Index tumbled 8.5%, while U.S. equity-index futures signaled a fifth straight day of losses. The rand dropped more than 3%. “Things are probably going to get worse before they get better,” Nader Naeimi at AMP Capital Investors said. “You really need rate cuts and more policy easing in China. In the meantime, things can get worse. We’ve got to see more clarity around the Fed.”

More than $5 trillion has been erased from the value of global stocks since China unexpectedly devalued the yuan, fueling speculation that the slowdown in the world’s second-largest economy may be deeper than previously thought. The rout is shaking confidence that the global economy will be strong enough to withstand higher U.S. interest rates. All major Asian markets were lower after U.S. stocks capped their biggest two-day retreat in almost four years Friday. Futures on the Standard & Poor’s 500 Index retreated as much as 3.1% after the U.S. benchmark plunged 5.2% through the final two days of last week. The MSCI Asia Pacific Index fell for a seventh straight day, sinking 4.3% by 12:57 p.m. Tokyo time, set for its lowest close since June 26, 2013. The gauge is on the cusp of a 20% slide from an April high.

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View from Oz.

• Global Bloodbath Sparks Financial Crisis Fears (News.com.au)

Global markets are in meltdown with losses approaching those not seen since the global financial crisis. Should we be worried? Absolutely. Australia bet big on never-ending Chinese growth and, increasingly, it looks like we could walk out of the casino empty-handed. Global stock markets have been rocked over the past few weeks amid growing signs of a slowdown in China. It’s causing fears we could be seeing a re-run of the 1997-98 Asian financial crisis, and there are dire implications for the Australian economy. The Australian market has plunged by 3.5% today as of 12:45 AEST, with almost $60 billion stripped from the value of the nation’s companies.

It’s the biggest daily fall since September 2011, and is compounding an already dismal stretch which is on track to be the worst month since the GFC. The benchmark S&P ASX 200 has fallen more than 16% from its highs near the 6000 mark earlier this year. The local market looks to be heading for its first negative year since 2011. From their highs earlier this year, US shares are now down 7.5%, eurozone shares are down 14%, Asian shares have fallen 20%, Chinese shares are down 32% and emerging market shares are down by 17%. Meanwhile, the Shanghai Composite has crashed 8.4% this morning, putting even greater pressure on Australian stocks, particularly the big mining companies.

On top of everything else, there are fresh fears that Greece could exit the euro after Prime Minister Alexis Tsipras called for snap elections after growing division within his radical left-wing Syriza party over the stricken country’s bailout deal. So should we be worried? “The short answer is absolutely,” said ABC Bullion chief economist Jordan Eliseo. “The volatility over the last week has simply revealed the fact that the primary cause of the GFC — excessive debt and capital misallocation — has not been solved.”

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Eruope off ‘only’ 2.5-3% as I write this. US futures look ugly.

• A Sell-Off Of Epic Proportions Spreads Further (FT)

Chinese equities fell more than 8% in the morning session, leading a sell-off across Asia that prompted fresh questions about what policymakers might do to staunch the losses. The benchmark Shanghai Composite fell 8.5%, erasing all of its 2015 gains, while the tech-heavy Shenzhen Composite tumbled 7.6%. Hong Kong’s Hang Seng Index lost 4.6%, extending its August decline to nearly 13%, writes Patrick McGee in Hong Kong. “Today has all the hallmarks of being one of the worst trading days of the past five years,” said Evan Lucas at IG, a spread-betting group. The MSCI Asia Pacific Index fell 4.3%, on pace for its lowest finish since late June 2013.

Before China markets opened the global equity rout of last week accelerated across Asia in a negative feedback loop. Once China joined in on the turmoil the sell-off accelerated and was joined by commodity prices. Tokyo’s Nikkei 225 slid 3.3%, falling below 19,000 for the first time since April, while the Topix sank 4.2%. In Sydney, the S&P/ASX 200 dropped 3.3%, while Taiwan’s Taiex was down as much as a 7.5% — at risk of its biggest daily sell-off since 1990 — before paring the loss to 4.3%. Turnover in Japan, Australia and Taiwan was 77%, 90% and 113% above the 30-day average. Bank and energy stocks led the declines as the slide in the price of commodities such as oil showed no signs of abating.

The Bloomberg Commodity Index, a 22 member gauge that looks at everything from egg futures to natural gas, fell 1.2% to $86.79, its lowest since 1999. Even the price of gold is down 0.4% today, as investors sell quality assets to raise much-needed cash for margin calls. The Chinese falls place further pressure on the country’s authorities to act. The Shanghai market fell nearly 12% last week as investors questioned whether Beijing was still propping up equities with an array of policies. A key manufacturing gauge hit a six-year low on Friday, spurring a wave of selling but drawing no real response from authorities. Many were expecting the People’s Bank of China to cut interest rates or inject liquidity over the weekend, however, no such steps were taken, heightening fears Beijing is no longer staking its credibility on bolstering the market.

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Yes, that would be 1999.

• Commodities Slump to 16-Year Low as China Slowdown Roils Markets (Bloomberg)

Commodities sank to the lowest level in 16 years, joining a rout in global equities and emerging-market currencies on concern that China’s economic slowdown will exacerbate gluts of everything from oil to metals. The Bloomberg Commodity Index of 22 raw materials lost as much 1.7% to 86.3542 points, the lowest level since August 1999. Resources stocks from BHP Billiton to Cnooc tumbled while Brent crude fell below $45 a barrel for the first time since 2009. “Sentiment is extremely negative across the commodity complex,” Mark Keenan at Societe Generale in Singapore, said in an e-mail. “Markets are plagued by concerns of oversupply.” Raw materials are in retreat as supplies outstrip demand amid forecasts for the slowest Chinese growth since 1990.

The largest user of energy, grains and metals was much weaker than anyone expected in the first half of the year, according to Ivan Glasenberg, head of commodity trader Glencore Plc. Chinese shares plunged after U.S. stocks sank last week. “It’s being fueled by the large drop in the Chinese stock market today, which is making people nervous about the management of the Chinese economy, which has direct implications for commodities,” Ric Spooner, a chief market strategist at CMC Markets Asia Pty, said by phone from Sydney. “It’s now basically a risk-off move.”

Shares in BHP, the world’s largest mining company, fell as much as 5.3% in Sydney to the lowest level since 2008, while Fortescue Metals Group Ltd. plunged 15% after reporting full-year profit dropped 88%. Nanjing Iron & Steel Co. led losses on the Shanghai Composite Index, sliding 10% as the gauge erased its gains for the year. Cnooc slumped 7.1% in Hong Kong. Oil has sunk as producers maintain or boost supply even as a glut persists, prioritizing sales over price. Iran will raise output at any cost to defend its market share, Oil Minister Bijan Namdar Zanganeh told his ministry’s news website, Shana.

Brent for October settlement declined as much as 3.2% to $44 a barrel on the ICE Futures Europe exchange, the lowest price since March 2009. West Texas Intermediate in New York dropped 3.2%, taking its loss over the past year to 58%. Copper on the London Metal Exchange lost as much as 3% to $4,903 a metric ton, the lowest since 2009. The metal is regarded as an indicator of global economic activity. Output topped demand by 151,000 tons in the six months through June, according to the World Bureau of Metal Statistics.

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Panic in Detroit: Reserve requirements down, pension funds forced to buy stocks. Remember when pensions could invest only in AAA rates assets?

• China Poised to Raise Banks’ Liquidity to Boost Lending (WSJ)

The People’s Bank of China is preparing to flood the banking system with liquidity to boost lending, according to officials and advisers to the central bank, as its recent currency moves are squeezing yuan funds out of the market and renewing concerns over capital leaving Chinese shores. The planned step—which involves cutting the deposits banks are required to hold in reserve—signals that the Chinese central bank’s exchange-rate maneuvering in the past two weeks is backfiring, forcing it to again resort to the reserve-requirement reduction, the same easing measure that so far has failed to help spur economic activity.

The move, which could come before the end of this month or early next month, would involve a half-percentage-point reduction in the reserve-requirement ratio, potentially releasing 678 billion yuan ($106.2 billion) in funds for banks to make loans. It would be the third comprehensive reduction in the reserve requirement this year. Another option being considered at the PBOC is to target the cut only at banks that lend large amounts to small and private businesses—the ones deemed key to China’s future growth—though such a strategy hasn’t proven effective in the past in channeling credit to those borrowers.

One concern the Chinese central bank has over further lowering the reserve-requirement ratio is that, in theory, releasing more liquidity could add to the depreciation pressure on the yuan. But right now, the PBOC’s bigger worry is over the liquidity squeeze as a result of its recent yuan intervention—actions that have resulted in yuan funds being drained from the financial system. That, on top of fresh signs of capital outflows, is threatening a shortage of funds at Chinese banks, causing greater market jitters. To ensure ample liquidity, the central bank is poised to cut the reserve-requirement again.

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All under control anyone?

• China’s One-Year Bonds Decline in Sign of Tightening Liquidity (Bloomberg)

China’s one-year sovereign bonds fell for a second day amid speculation liquidity is tightening as the central bank buys yuan to support the exchange rate. The People’s Bank of China will likely cut lenders’ reserve requirements this week or next to replenish funds in the financial system and help arrest an economic slowdown, according to Standard Chartered. The currency has been kept at about 6.40 per dollar since Aug. 13, after a surprise devaluation led to a 3% drop over three days. Only the Hong Kong dollar, which is pegged, has been more stable over the past week among 31 major currencies.

The yield on notes due July 2016 rose three basis points to 2.35% as of 11:36 a.m. in Shanghai, according to National Interbank Funding Center prices. That for June 2018 debt increased two basis points to 2.90%. “It’s clear that the central bank wants to stabilize the exchange rate by selling dollars and buying the yuan via big banks, and the result is naturally a drop of local currency supply,” said Huang Wentao, an analyst at China Securities Co. in Beijing. “This is why some investors are refraining from putting money into the bond market. Reserve-ratio cuts could lead to further depreciation pressure, and that’s why the PBOC would prefer to use reverse repos in the short-term.”

To hold down borrowing costs, the PBOC is adding funds via loans to banks. It conducted 240 billion yuan ($37.5 billion) of reverse-repuchase agreements last week and extended 110 billion yuan using its Medium-term Lending Facility. The overnight repurchase rate, a gauge of funding availability in the banking system, was poised to increase for a record 38th day. It was at 1.83%, the highest level since April, according to a weighted average compiled by the National Interbank Funding Center. The seven-day repo rate fell two basis points to 2.53%, after rising to a six-week high of 2.58% on Aug. 20.

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It was all only ever a sleight of hand.

• Is The Game Up For China’s Much Emulated Growth Model? (Ghosh)

[..] the “recovery package” in China essentially encouraged more investment, which was already nearly half of GDP. Provincial governments and public sector enterprises were encouraged to borrow heavily and invest in infrastructure, construction and more production capacity. To utilise the excess capacity, a real estate and construction boom was instigated, fed by lending from public sector banks as well as “shadow banking” activities winked at by regulators. Total debt in China increased fourfold between 2007 and 2014, and the debt-GDP ratio nearly doubled to more than over 280%. We now know that these debt-driven bubbles end in tears. The property boom began to subside in early 2014, and real estate prices have been stagnant or falling ever since.

Chinese investors then shifted to the stock market, which began to sizzle – once again actively encouraged by the Chinese government. The crash that followed has been contained only because the government pulled out all the stops to prevent further falls. All this comes in the midst of an overall slowdown in China’s economy. Exports fell by around 8% in the year to July. Manufacturing output is falling, and jobs are being shed. Construction activity has almost halted, especially in the proliferating “ghost towns” dotted around the country. Stimulus measures such as interest rate cuts don’t seem to be working. So the recent devaluation of the yuan– which has been dressed up as a “market-friendly” measure – is clearly intended to help revive the economy.

But it will not really help. Demand from the advanced countries – still the driver of Chinese exports and indirectly of exports of other developing countries – will stay sluggish. Meanwhile, China’s slowdown infects other emerging markets across the world as its imports fall even faster than its exports and its currency moves translate into capital outflows in other countries. The pain is felt by commodity producers and intermediate manufacturers from Brazil to Nigeria and Thailand, with the worst impacts in Asia, where China was the hub of an export-oriented production network. Many of these economies are experiencing collapses of their own property and financial asset bubbles, with negative effects on domestic demand. The febrile behaviour of global finance is making things worse. This is not the end of the emerging markets, but is – or should be – the end of this growth model.

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Forced.

• Chinese Pension Fund ‘Allowed’ To Invest In Stock Market (BBC)

China plans to let its main state pension fund invest in the stock market for the first time, the country’s official news agency, Xinhua, has reported. Under the new rules, the fund will be allowed to invest up to 30% of its net assets in domestically-listed shares. China’s main pension fund holds 3.5tn yuan ($548bn; £349bn), Xinhua said. The move is the latest attempt by the Chinese government to arrest the slide in the country’s stock market. The fund will be allowed to invest not just in shares but in a range of market instruments, including derivatives. By increasing demand for them, the government hopes prices will rise. The Shanghai Composite Index closed down more than 4% on Friday after figures showed monthly factory activity contracting at its fastest pace in six years.

It capped a tough few days for Chinese investors, with the index down 12% on the week. Chinese shares are now down more than 30% since the middle of June. Earlier this month, the Chinese central bank devalued the yuan in an attempt to boost exports. These measures come against a backdrop of slowing economic growth in China. In the second quarter of this year, the country’s economy grew by 7% – its slowest pace for six years. Last year, the economy grew at its slowest pace since 1990. Fears of a prolonged slowdown have also hit global stock markets, with US and leading European indexes posting heavy losses last week.

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We’re poised to see a lot of this.

• Angry Investors Capture Head Of China Metals Exchange (FT)

The head of a Chinese exchange that trades minor metals was captured by angry investors in a dawn raid and turned over to Shanghai police, as the investors attempted to force the authorities to investigate why their funds have been frozen. Investors have been protesting for weeks after the Fanya Metals Exchange in July ceased making payments on financial investment products. The exchange, based in the southwestern city of Kunming, bought and stockpiled minor metals such as indium and bismuth, while also offering high interest, highly-liquid investment products from its offices in Shanghai and its financing branch in Kunming. Troubles at the exchange are one of many factors contributing to turbulence in China’s financial markets, as a slowing economy exposes the weaknesses of the country’s debt-driven growth.

Some investors flew in from faraway cities to join hundreds more surrounding a luxury hotel in Shanghai before dawn on Saturday. When Fanya founder Shan Jiuliang attempted to check out, they manhandled him into a car before delivering him to the nearest police station. Shanghai police took Mr Shan into custody and promised to work with local authorities in Yunnan province to investigate what has happened to investors’ money. They later released him without charge. The demonstrations in Shanghai and Kunming and the exchange’s unusual accumulation of several years’ supply of some metals have so far failed to attract much public attention from regulators. A report by the local regulator identifying the exchange as one of the bigger investment risks in Yunnan was redacted to remove reference to Fanya late last year.

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“The selloff [..] relegated Hong Kong to the same trading orbit as Pakistan..”

• Hong Kong Can’t Escape the Turmoil Next Door (Pesek)

Twelve months ago, it seemed Beijing’s retrograde politics would eventually sink Hong Kong’s exalted international reputation. Now China’s ailing economy seems likely to finish off the job sooner than anyone expected. Hong Kong is dealing with a long list of problems, including tumbling tourist arrivals, a dollar peg that makes it the priciest place in Asia, a precarious property bubble and a leader not up to even mundane challenges never mind an existential crisis. And that’s before you even get to Hong Kong’s biggest challenge: the fallout from China’s loss of economic credibility around the globe. How else to explain the 9% drop in the Hang Seng Index since Beijing’s Aug. 10 devaluation?

The selloff put the city’s valuations at their lowest, relative to global equities, since 2003, and relegated Hong Kong to the same trading orbit as Pakistan, a place grappling with chronic power shortages. Forbes magazine spoke for many last year when it asked: “Is Hong Kong Still China’s Golden Goose?” The concern then was that political turmoil would disrupt Hong Kong’s status as China’s financial green zone, where companies can enjoy the rule of law and politicians can invest ill-gotten millions in real estate and with Beijing-friendly billionaires. Hong Kong seemed to be the perfect Chinese special-enterprise zone – except for the mounting discontent among the city’s middle class, whose needs tended to be ignored in favor of the tycoons lording over the city.

When hundreds of thousands of residents began protesting in favor of democracy in September 2014, the city’s chief executive Leung Chun-ying, like the good Communist functionary he is, shut the demonstrations down. Political discord no longer seems an immediate existential threat to the city’s special status – but China’s sputtering economy does. Waning trust in the Chinese economy is driving investors away from Hong Kong, while China’s devaluation is making the city less attractive for mainland tourists enticed by cheaper destinations like Japan. Economy Secretary So Kam-leung blamed the 8.4% drop in visitors in July on the strong dollar. Retail sales in the city declined for a fourth straight month in June.

Hong Kong doesn’t have many good options. For years economists urged Hong Kong to diversify its growth engines – more tech and science startups, fewer hedge funds and property developers riding mainland growth. Rather than deliver the changes Hong Kong needed, Leung has squandered his three years as chief executive kowtowing to his Communist Party benefactors in Beijing.

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All central banks that matter these days are Ponzi scams.

• Central Banks Have Become A Corrupting Force (Roberts and Kranzler)

Are we witnessing the corruption of central banks? Are we observing the money-creating powers of central banks being used to drive up prices in the stock market for the benefit of the mega-rich? These questions came to mind when we learned that the central bank of Switzerland, the Swiss National Bank, purchased 3,300,000 shares of Apple stock in the first quarter of this year, adding 500,000 shares in the second quarter. Smart money would have been selling, not buying. It turns out that the Swiss central bank, in addition to its Apple stock, holds very large equity positions, ranging from $250,000,000 to $637,000,000, in numerous US corporations — Exxon Mobil, Microsoft, Google, Johnson & Johnson, General Electric, Procter & Gamble, Verizon, AT&T, Pfizer, Chevron, Merck, Facebook, Pepsico, Coca Cola, Disney, Valeant, IBM, Gilead, Amazon.

Among this list of the Swiss central bank’s holdings are stocks which are responsible for more than 100% of the year-to-date rise in the S&P 500 prior to the latest sell-off. What is going on here? The purpose of central banks was to serve as a “lender of last resort” to commercial banks faced with a run on the bank by depositors demanding cash withdrawals of their deposits. Banks would call in loans in an effort to raise cash to pay off depositors. Businesses would fail, and the banks would fail from their inability to pay depositors their money on demand. As time passed, this rationale for a central bank was made redundant by government deposit insurance for bank depositors, and central banks found additional functions for their existence.

The Federal Reserve, for example, under the Humphrey-Hawkins Act, is responsible for maintaining full employment and low inflation. By the time this legislation was passed, the worsening “Phillips Curve tradeoffs” between inflation and employment had made the goals inconsistent. The result was the introduction by the Reagan administration of the supply-side economic policy that cured the simultaneously rising inflation and unemployment. Neither the Federal Reserve’s charter nor the Humphrey-Hawkins Act says that the Federal Reserve is supposed to stabilize the stock market by purchasing stocks. The Federal Reserve is supposed to buy and sell bonds in open market operations in order to encourage employment with lower interest rates or to restrict inflation with higher interest rates.

If central banks purchase stocks in order to support equity prices, what is the point of having a stock market? The central bank’s ability to create money to support stock prices negates the price discovery function of the stock market.

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Why the rate hike may still happen.

• The Fed Is Looking at a Very Different Dollar Than Wall Street (Bloomberg)

By many popular measures, the dollar has traded sideways for the last six months. Then there’s the Federal Reserve’s measure. The greenback is surging, according to an index the Fed created to track the U.S. currency versus 26 of the country’s biggest trading partners. It’s risen 1.3% beyond a 12-year high reached in March, when the central bank fired the first of a series of warnings that a stronger dollar may hurt growth and lower inflation. At a time when the Fed’s tightening path has become one of the biggest drivers in the $5.3 trillion-a-day foreign-exchange market, the discrepancy between Wall Street’s view – largely based on the dollar’s performance against the euro and the yen – and that of policy makers may lead to a jolt for investors expecting recent ranges to persist.

The rapid trade-weighted appreciation this quarter has come mostly against big exporters such as China and Mexico, and it undercuts the Fed’s goal of quicker inflation. It may trigger further jawboning from officials looking to cool the dollar’s broad gains as the Fed begins raising interest rates for the first time in almost a decade. “The dollar still continues to strengthen on a trade-weighted basis and the Fed definitely takes that into the equation,” said Brad Bechtel, a managing director at Jefferies Group LLC in New York. “The risk is the Fed starts really emphasizing that, and the market would be caught offside.” The Fed’s trade-weighted broad dollar index measures the greenback against the currencies of 26 economies according to the size of bilateral trade. China, Mexico and Canada make up 46% of the gauge.

Meanwhile, most private-sector dollar gauges track a basket of the world’s most liquid, widely used currencies. Intercontinental Exchange Inc.’s U.S. Dollar Index, which serves as the benchmark for various futures and options instruments, has a 58% weight to the euro and 14% for the yen. It lacks representation from any emerging markets, which account for more than half of the U.S.’s total trade flow. The two indexes had moved alongside each other until a month ago. The Fed’s broad dollar index surged 3.4% this quarter to a 12-year high as China devalued the yuan to support a slowing economy, while a renewed commodities rout undermined Canada’s loonie and the Mexican peso. The ICE dollar gauge dropped 0.7% during the same period.

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Amen.

• It’s Time To Lay Siege To The Robber Barons Of High Finance (Ben Chu)

Rent extraction, or “rent-seeking” as it is also often known, has evolved and broadened as an economic concept. It now covers a whole range of activities in a modern economy. A famous example used in economic textbooks is licensed taxis. Black cab drivers pressure city authorities to clamp down on the activities of unlicensed minicabs. More recently they’ve also tried to get new entrants to the taxi market, like those who work for the Uber web app service, banned. To the extent they are successful in these rent-seeking activities they boost the value of their own licences. It is their customers who end up paying in the form of higher fares. But cabbies are small fry in the rent-extraction ocean.

A more lucrative practice is found in the law firms that mildly tweak and re-file patents as a means of squeezing more money out of clients’ old intellectual property, or who aggressively sue other firms over minor and often spurious infringements. None of this incentivises more research or innovation. And it is the public who pay for this “patent trolling” in higher prices for products. But easily the biggest source of wealth extraction in modern economies is the wholesale financial sector. Much of the activity of Wall Street and City of London traders in investment bankers constitute a form of rent-extraction. Their phenomenally lucrative market-making activities in interest rates and foreign exchange don’t actually create new wealth – they merely shift money from the pockets of companies and pension funds into their own.

In a properly functioning market new players would enter and these outsize market-making profits would be competed away. But the sheer size of these financial dealers erects effective barriers to entry, curbing competition. And the “too big to fail” status of these mega financial institutions (which provides an implicit state guarantee) also secures them artificially cheap finance in the money markets, compounding their commercial advantage. But how do we distinguish rent extraction from high profits due to legitimate business success? A good indicator is the extent to which their profits seem to be dependent on political and official connections.

The American financial sector has spent $6.6bn (£4.2bn) since 1998 lobbying US politicians, according to researchers. It seems unlikely they would spend such sums for no reason. Our own ministers also seem to have an open door for the UK financial lobby. The power of the lobby can be seen in the fact that widespread calls to simply break up the too-big-to-fail banks in the wake of the global financial crisis were rejected on both sides of the Atlantic by politicians.

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And who do you think pays for this?

• Bank Litigation Costs Hit $260 Billion With $65 Billion More To Come (FT)

The wave of fines and lawsuits that has swept through the financial industry since the 2007/8 crisis has cost big banks $260bn, new research from Morgan Stanley shows. The analysis, which covers the five largest banks in the US and the 20 biggest in Europe, predicts the group will incur another $60bn of litigation costs in the next two years. Bank of America, Morgan Stanley, JPMorgan, Citi and Goldman Sachs have borne the brunt of the fines so far, collectively paying out $137m. They have another $15bn to come in the next two years, Morgan Stanley said. The top 20 European banks have paid out about $125bn and have about $50bn to come “albeit with a wide range”, the analysis said.

In the States … there have been more precedents on settlements and so as more banks have settled, the market’s ability to make a guesstimate of the amount for other banks has improved, said Huw van Steenis, managing director at Morgan Stanley. Mr van Steenis said the fines, which cover everything from foreign exchange rate rigging to US mortgage-backed securities and mis-selling of payment protection insurance in the UK, are having a profound impact on the banks. Litigation not only takes a bite out of your equity but has a much longer lasting impact on the amount of capital you need to hold, he said. The figures include fines and penalties banks have already paid, plus any provisions taken by June 30 for issues the groups see coming down the tracks, such as US mortgage fines that European banks expect to pay.

The report also charts what banks have done to reduce the risk of future litigation, but concludes that lack of disclosure means it has been difficult for us to say definitively which firms have developed the best practices overall . Bank of America is spending $15bn a year on compliance, Morgan Stanley said, while JPMorgan is spending $8bn or $9bn. Mr van Steenis and his colleagues said they struggled to obtain consistent data on extra compliance costs in Europe. The impact goes beyond the financial. A lot of management time and IT budget has been focused on rectifying malfeasance rather than being able to position the bank for the future, said Mr van Steenis.

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A crazed country.

• Brazil’s Scandal Takes Another Toxic Turn (Bloomberg)

On Thursday, Brazilian Attorney General Rodrigo Janot formally charged Eduardo Cunha, Brazil’s highest-ranking lawmaker with commanding a farrago of felonies, including shaking down suppliers of Petrobras, the scandal-ridden national oil company, for some $5 million, and then laundering the bribes through more than 100 financial operations from Montevideo to Monaco. Running 85 pages and garnished with an aphorism by Mahatma Gandhi, the indictment reads like the production notes to a noir movie script. My favorite scene: 250,000 reais (around $71,000) in booty decanted through Cunha’s preferred house of worship, the Assembly of God.

Not surprisingly, Janot’s indictment has enthralled Brasilia, where President Dilma Rousseff has seen the national economy and her approval ratings sink to record lows, and not even core allies can be trusted to back her emergency reforms. Ever since Cunha won the right to the top microphone in Congress, trouncing Rousseff’s own candidate for the job, the Rio de Janeiro lawmaker has dedicated his mandate to making her life miserable, delaying revenue raising initiatives and planting some “fiscal bombs” in Congress that would plump constituents’ earnings at the expense of the swelling public deficit. So how do you say schadenfreude in Portuguese? After weeks of escalating rhetoric and street protests clamoring for impeachment, suddenly it’s Rousseff’s archenemy who looks to be on the brink.

But hold those vuvuzelas. While Cunha may be hobbled by the scandal, he’s hardly out of play. Even if the Supreme Court accepts Janot’s indictment and sends Cunha to trial, he has no obligation to step aside. Removing him would take half plus one of the 513 members of Brazil’s lower house, an ecosystem where Cunha is at home.

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This is getting beyond shameless.

• EU Border Agency Frontex To Boost Patrols In Aegean To Halt Migrants (Kath.)

A joint action plan drafted by the Greek Police, the Hellenic Coast Guard and Frontex aims to boost patrols in the eastern Aegean in a bid to curb a dramatic influx of refugees and immigrants, Fabrice Leggeri, the executive director of the EU’s border monitoring agency, has told Kathimerini. The key goal of the European border guards will be to spot smuggling vessels heading toward Greece from neighboring Turkey before they enter Greek waters and to inform Turkish Coast Guard officials so the vessels can be returned. The Frontex officials to be dispatched to Greece are to conduct sea patrols but also land patrols on islands such as Lesvos and Kos that have borne the brunt of an intensified influx of migrants.

In an interview with Kathimerini, Leggeri said European Union member-states have appeared reluctant to contribute equipment, particularly technical equipment, that Greek authorities need to effectively deal with the migration crisis. He said the organization’s budget for operations in Greece has been tripled, to €18 million, adding that he was pushing to secure as much aid as possible for the country. The EU “must show solidarity,” he said, noting that Greece, Italy and Hungary have been hit the hardest by the migration crisis, and to a lesser extent Spain.

A total of 340,000 refugees and immigrants have entered the European Union so far this year, he said, blaming the increase primarily on the war in Syria but also on a deteriorating security situation in Libya, which has discouraged migrants from taking that route. This week, Greek Police and Hellenic Coast Guard officials are to meet with Frontex officials at the agency’s office in Piraeus to hammer out a strategy.

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Oh, right, and Merkel has shown herself to be a real leader, right?!

• Germany Shames EU for Failure to Shoulder Refugee Surge

The unwillingness of most European Union states to accommodate a surge in refugees amassing at the trade bloc’s southern fringes is a “huge disgrace,” German Vice Chancellor Sigmar Gabriel said. Speaking on the country’s ARD television Sunday, Gabriel said just three countries – Germany, Sweden and Austria – were taking on more refugees, with most states snubbing their plight. By closing the door to people fleeing wars, the EU puts its internal open-border policy at risk, Gabriel said. “I find it a huge disgrace when the majority of member states say, ’that’s got nothing to do with us’,” said the Social Democrat chairman, whose party co-rules with Chancellor Angela Merkel’s Christian Democrats. “Returning to a Europe without open borders will have catastrophic economic, political and cultural consequences.”

Germany and the EU Commission are failing to break the opposition of EU partners including the U.K., Spain, Denmark and Hungary to taking on a larger share of refugees thronging on the bloc’s borders. Germany can cope with a fourfold influx of refugees this year, to about 800,000, but “not indefinitely,” Gabriel said. Merkel and French President Francois Hollande will reopen the question of refugee quotas for individual EU members when they meet in Berlin tomorrow, French Foreign Minister Laurent Fabius said in Prague. An earlier effort to assign a firm number of refugees to each EU country failed after a majority of the bloc’s members refused to commit.

Hungary is building a wall along its border with Serbia to prevent refugees from crossing. Denmark in July said it would cut benefits for asylum seekers in a bid to stem their influx. Estonia said it could accept just 150-200 refugees over two years, while U.K. Prime Minister David Cameron this month characterized people trying to enter his country illegally from north Africa as a “swarm.” Underlining the urgency of countering the EU’s disunity over its refugee problem is a gross miscalculation of the number of people fleeing to the continent from such countries as Syria, Iraq, Eritrea and Afghanistan. As late as May, Germany predicted the number of refugees and asylum seekers entering the country this year at 450,000.

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Is This Black Monday Crash The BIG ONE? It Doesn’t Matter

Aug 242015
 
 August 24, 2015  Posted by at 9:00 am Finance Tagged with: , , , , ,  13 Responses »


NPC Grand Palace shoe shining parlor, Washington DC 1921

After losing 11% last week, Shanghai this morning was down almost -9% at one point, after lunch went back up to -6.5%, and ended its day at -8.49%. A Black Monday for sure, but is this the BIG ONE? It really doesn’t matter one bit. Unless perhaps you persist in calling your self an investor, in which case we pity you, but not for losing your shirt. Because God knows we’ve said enough times now that there are no functioning markets anymore, and therefore no-one who can rightfully lay claim to the title ‘investor’.

Plenty amongst you will be talking about economic cycles, and opportunities, and debate how to ‘play’ the crash, but all this is useless if and when a market doesn’t function. And just about all markets in the richer part of the world stopped functioning when central banks started buying assets. That’s when you stopped being investors. And when market strategies stopped making sense.

Central banks will come up with more, much more, ‘stimulus’, but what China teaches us today is that we’re woefully close to the moment when central banks will lose the faith and trust of everyone. After injecting tens of billions of dollars in markets, which thereby ceased to function, the global economy is in a bigger mess then it was prior to QE. The whole thing is one big bubble now, and we know what invariably happens to those.

More QE is not an answer. And there is no other answer left either. Those tens of trillions will need to vanish from the global economy before any market can be returned to a functioning one, and by that time of course asset prices will be fraction of what they are now. It may not happen today, but that doesn’t matter: what’s important to know is that it WILL happen.

And if you keep being out there trying to outsmart a non-functioning market, you’ll get burned as badly as the millions of Chinese grandmas who already lost 20%+ so far just this month. And that’s just on their share holdings; Chinese property ‘markets’ will be at least as badly burned.

China’s leaders, and its people, have walked eyes wide open into an ugly albeit nigh perfect trap. They’ve all started to believe that borrowing more could make them richer. Outstanding credit across the entire society has reached idiotic proportions. We can get somewhat of a glance at what levels debt have reached in Steve Keen’s Is This The Great Crash Of China?, in which he argues that a crash is inevitable, simply given those levels.

But we can at the same time be sure that this doesn’t tell the whole story. Much of what has gone on in the shadow banking sector remains unknown and carefully hidden. Thousands of local governments have plunged themselves into the deep end borrowing from trusts and other often shady instruments, at interest levels much higher than the ‘official’ ones. Even these shadow trusts last week have begun asking for bailouts, a development that can only make one think of a Godfather episode of one’s choice.

China’s first big mistake is that Xi and Li and their ilk think they can control housing and stock markets. Which basically means they think they can stop people from selling property and assets when they feel these might go down in ‘value’.

China’s second big mistake is that so many people believe that Xi and Li actually have any such control. Which means the people don’t sell nearly soon enough, and will be saddled with the losses. From an economic perspective, it’s an exercise in stupid futility, or, if you prefer, futile stupidity.

Add to this that the credit that allowed the Chinese to purchase all these alleged assets came from nowhere, and will therefore of necessity have to go back to nowhere, and you have a recipe for deflationary debt deleveraging the likes of which the world may never have seen before in history, unless perhaps you count the tulip- or South Sea bubbles, but they are just small scale anecdotes compared to today.

This deleveraging will be global. We pity the many millions of poor souls who think that countries like the US and Britain will be spared the worst because their economies are doing ‘so well’. Doing well in a global Ponzi is not a recommendation.

China’s fall is being exacerbated by the fact that it has two -heavily intertwined- parties who believe in their own omnipotence, the government (Politburo) and the central bank. Both are being found out at the same moment. And both will resist this discovery. As will all central banks in the west, where at least any idea of omnipotence of governments has long been eradicated.

But the entire west has become so addicted to China’s debt, and the illusion of prosperity and economic recovery it has brought, that all prices everywhere must come down, as noted above, until the tens of trillions of dollars in stimulus measures have vanished into the thin air they were fabricated in. Until value becomes real value again, not this virtual zombie Ponzi pricing.

Today may be just a warning sign, and it may take a while longer before the deluge, but it will come. And since China has nothing left to fall back on but even higher private and public debt levels, make that sooner rather than later.

The main advice we’ve always given with regards to debt deleveraging stands: get out of debt.

Meanwhile, the western financial press, which has been reporting on non-functioning markets for years as if they actually were still functioning, is worrying about a potential Fed rate hike, telling its readers and listeners that the US central bank ‘looks set to make a dangerous mistake’. But the real ‘mistake’ was made a long time ago.

Debt Rattle May 25 2015

May 252015
 
 May 25, 2015  Posted by at 10:11 am Finance Tagged with: , , , , , , , , , ,  Comments Off on Debt Rattle May 25 2015


Harris&Ewing District National Bank, Washington, DC 1931

• Memorial Day: Our Soldiers Died For The Profits Of The Bankers (Smedley Butler)
• Europe’s Biggest Debt Collector: Central Banks’ Stimulus Has Failed (Bloomberg)
• “It’s A Coup D’Etat”, “Central Banks Are Out Of Control” – David Stockman (ZH)
• Unemployment Is a Big Threat to Eurozone Economy, Central Bankers Warn (WSJ)
• HSBC Fears World Recession With No Lifeboats Left (AEP)
• Did China Just Launch World’s Biggest Spending Plan? (Gordon Chang)
• G7 Finance Ministers To Address Faltering Global Growth (Reuters)
• Schaeuble Expects Conflict at Dresden G-7 Over Austerity Policy (Bloomberg)
• Greece Hasn’t Got The Money To Make June IMF Repayment (Reuters)
• Greece’s Misery Shows We Need Chapter 11 Bankruptcy For Countries (Guardian)
• Greeks Back Government’s Red Lines, But Want To Keep Euro (AFP)
• The Truth About Riga (Yanis Varoufakis)
• The Bloodied Idealogues vs. The Bloodthirsty Technocrats (StealthFlation)
• Spain’s Ruling Party Battered In Local And Regional Elections (EUObserver)
• Catalan Independence Bid Rocked by Podemos Victory in Barcelona (Bloomberg)
• Auckland Nears $1 Million Average House Price (Guardian)
• Monsanto’s GMO Cotton Problems Drive Indian Farmers To Suicide (RT)
• ‘Incredibly Diverse’, Endangered Plankton Provide Half The World’s Oxygen (SR)

Smedley Butler knew it way back in 1933.

• Memorial Day: Our Soldiers Died For The Profits Of The Bankers (Smedley Butler)

Memorial Day commemorates soldiers killed in war. We are told that the war dead died for us and our freedom. US Marine General Smedley Butler challenged this view. He said that our soldiers died for the profits of the bankers, Wall Street, Standard Oil, and the United Fruit Company. Here is an excerpt from a speech that he gave in 1933:

“War is just a racket. A racket is best described, I believe, as something that is not what it seems to the majority of people. Only a small inside group knows what it is about. It is conducted for the benefit of the very few at the expense of the masses. I believe in adequate defense at the coastline and nothing else. If a nation comes over here to fight, then we’ll fight. The trouble with America is that when the dollar only earns 6% over here, then it gets restless and goes overseas to get 100%. Then the flag follows the dollar and the soldiers follow the flag. I wouldn’t go to war again as I have done to protect some lousy investment of the bankers. There are only two things we should fight for. One is the defense of our homes and the other is the Bill of Rights. War for any other reason is simply a racket.

There isn’t a trick in the racketeering bag that the military gang is blind to. It has its “finger men” to point out enemies, its “muscle men” to destroy enemies, its “brain men” to plan war preparations, and a “Big Boss” Super-Nationalistic-Capitalism. It may seem odd for me, a military man to adopt such a comparison. Truthfulness compels me to. I spent thirty-three years and four months in active military service as a member of this country’s most agile military force, the Marine Corps. I served in all commissioned ranks from Second Lieutenant to Major-General. And during that period, I spent most of my time being a high class muscle- man for Big Business, for Wall Street and for the Bankers. In short, I was a racketeer, a gangster for capitalism.”

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“A rate that is too low, or a rate that many of us have never experienced, is so extraordinary that it doesn’t create any stability or faith in the future at all..”

• Europe’s Biggest Debt Collector: Central Banks’ Stimulus Has Failed (Bloomberg)

The head of Europe’s biggest debt collector says the historic wave of stimulus spilling out of central banks has failed to fuel investment growth. Lars Wollung, the chief executive officer of Intrum Justitia AB, warned that record-low interest rates “don’t seem to lead to investments that create jobs,” in an interview in Stockholm. “A rate that is too low, or a rate that many of us have never experienced, is so extraordinary that it doesn’t create any stability or faith in the future at all,” he said. “Rather the opposite: one feels insecure and waits with expansion plans and to hire more people.” The comments mark a blow to central banks who have resorted to everything from negative rates to bond purchases to aid growth.

A study by Intrum Justitia shows 73% of the almost 9,000 European firms surveyed between February and April said low interest rates brought about “no change in investments.” Some even reported a decline. In Sweden, where the central bank’s main rate is minus 0.25%, 82% of companies said it made no difference to their investments. What companies need if they’re “to believe in the future” is certainty that their bills will be paid, Wollung said. That means clearer payments legislation and more incentives for borrowers to repay their debts on time, he said. Intrum Justitia has devoted resources to lobbying officials in Brussels in an effort to bring across its point, Wollung said.

In Germany and Scandinavia, where companies and borrowers can refer to clear and robust legal systems, unemployment is low and economic growth strong, he said. A German firm waits 17 days on average to get paid by a client company. In Italy, it takes 80 days, Intrum figures show. The survey indicates that about 8 million European companies would hire more people if they got their payments faster. “Late payments are a significant problem for companies,” Wollung said. Having a stable cash flow is “probably more important than if interest rates are at 1% or 0.5%,” he said.

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No holds barred.

• “It’s A Coup D’Etat”, “Central Banks Are Out Of Control” – David Stockman (ZH)

We’re all about to be taken to the woodshed, warns David Stockman in this excellent interview. The huge wealth disparity is “not because of some flaw in capitalism, or Reagan tax cuts, or even the greed of Wall Street; the problem is central banks that are out of control.” Simply put, they have “syphoned financial resources into pure gambling” and the people that own the stocks and bonds get the huge financial windfall. “The 10% at the top own 85% of the financial assets,” and thus, thanks to the unleashing of almost limitless money-printing, which has created a massive worldwide financial inflation, “the central banks have created and exaggerated the wealth gap.” Stockman concludes, rather ominously,

“it’s a coup d’etat, the central banks have taken over – unconstitutional domination of the entire economy.” “Everywhere, misleading distorted signals are being given to both public and private sector players about financial values… the prices have been falsified by The Fed. We can’t print our way to prosperity… The Fed is now petrified that Wall Street will have a hissy-fit when they tighten.”

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Well, they caused it.

• Unemployment Is a Big Threat to Eurozone Economy, Central Bankers Warn (WSJ)

High and divergent unemployment rates in Europe pose a serious threat to the region’s long-term economic health, central bankers and economists warned during a weekend conference held by the European Central Bank. But they stopped short of offering specific advice on the best steps to take. The ECB’s seminar, the second of what it plans as an annual conference in the resort town of Sintra on Portugal’s western coast, brought together central bankers and economists from Europe, the U.S. and Asia to examine the root causes of high unemployment and persistently weak inflation in Europe. The attendees dwelled extensively on an economic concept known as “hysteresis,” a reduction in economic output brought on by weak growth that gives rise to long-term unemployment.

The remedies to such problems, however, lie partly with fiscal-policy officials and not central bankers, who don’t set labor and other economic policies. The conference largely lacked representatives from finance ministries and businesses. But ECB President Mario Draghi signaled that the stakes were too high for central bankers to keep silent, particularly in the 19-member eurozone, where diverse countries ranging from powerful Germany to recession-ravaged Greece set their own economic and fiscal policies but share a single currency and monetary policy. “In a monetary union you can’t afford having large and increasing structural divergences between countries,” Mr. Draghi said on Saturday. “They tend to become explosive; therefore they are going to threaten the existence of the monetary union.”

The eurozone is the world’s second-biggest economy after the U.S. But in recent years it has emerged as one of the global economy’s main trouble spots, having struggled through a pair of recessions since 2009 that pushed the bloc’s unemployment rate into double digits. The region has started to recover, but the damage has resulted in huge gaps in unemployment across the eurozone. “Unemployment in Europe, notably youth unemployment, is not only unbearably high. It is also unbearably different across nations belonging to an economic and monetary union,” Tito Boeri, professor at Bocconi University, and Juan Jimeno of the Bank of Spain wrote in a conference paper.

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“JP Morgan estimates that the US economy contracted at a rate of 1.1pc in the first quarter..” “China accounted for 85pc of all global growth in 2012, 54pc in 2013, and 30pc in 2014. This is likely to fall to 24pc this year.”

• HSBC Fears World Recession With No Lifeboats Left (AEP)

The world economy is disturbingly close to stall speed. The United Nations has cut its global growth forecast for this year to 2.8pc, the latest of the multinational bodies to retreat. We are not yet in the danger zone but this pace is only slightly above the 2.5pc rate that used to be regarded as a recession for the international system as a whole. It leaves a thin safety buffer against any economic shock – most potently if China abandons its crawling dollar peg and resorts to ‘beggar-thy-neighbour’ policies, transmitting a further deflationary shock across the global economy. The longer this soggy patch drags on, the greater the risk that the six-year old global recovery will sputter out. While expansions do not die of old age, they do become more vulnerable to all kinds of pathologies.

A sweep of historic data by Warwick University found compelling evidence that economies are more likely to stall as they age, what is known as “positive duration dependence”. The business cycle becomes stretched. Inventories build up and companies defer spending, tipping over at a certain point into a self-feeding downturn. Stephen King from HSCB warns that the global authorities have alarmingly few tools to combat the next crunch, given that interest rates are already zero across most of the developed world, debts levels are at or near record highs, and there is little scope for fiscal stimulus. “The world economy is sailing across the ocean without any lifeboats to use in case of emergency,” he said.

In a grim report – “The World Economy’s Titanic Problem” – he says the US Federal Reserve has had to cut rates by over 500 basis points to right the ship in each of the recessions since the early 1970s. “That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large,” he said. The authorities are normally able to replenish their ammunition as recovery gathers steam. This time they are faced with a chronic low-growth malaise – partly due to a global ‘savings glut’, and increasingly to a slow ageing crisis across most of the Northern hemisphere. The Fed keeps having to defer its first rate rise as expectations fall short.

Each of the past four US recoveries has been weaker than the last one. The average growth rate has fallen from 4.5pc in the early 1980s to nearer 2pc this time. The US fiscal deficit has dropped to 2.8pc but is expected to climb again as pension and health care costs bite, even if the economy does well. The US cannot easily launch a fresh New Deal. Public debt was just 38pc on GDP when Franklin Roosevelt took power in 1933, and there were few contingent liabilities hanging over future US finances. “Fiscal stimulus – a novel idea at the time – may have been controversial, but the chances of it working to boost economic activity were quite high given the healthy starting position. Today, it is much more difficult to make the same argument,” he said.

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” The reason for the fall in new loans is clear. There is a fundamental lack of demand in China.”

• Did China Just Launch World’s Biggest Spending Plan? (Gordon Chang)

Beijing has just initiated a round of accelerated government spending, and it will, in all probability, end up as the biggest such effort today. Wednesday, the Chinese central government announced both the allocation of 1.13 trillion yuan ($185.8 billion) for upgrading internet infrastructure and the creation of a 124.3 billion yuan fund for affordable housing. These expenditures follow Monday’s authorization of six new rail lines costing 250 billion yuan. This month, as Xinhua News Agency reports, Beijing has unveiled a “pro-growth measure” at the rate of one every two days. April was a banner month for Beijing’s spenders as well. The Ministry of Finance reported a 33.2% increase in fiscal spending compared with same month in 2014.

For the last several years, Beijing has been using fiscal stimulus in varying amounts to keep the economy humming. No one, however, thought Premier Li Keqiang, generally considered a reformer, would resort to the old-line, anti-reform tactic of massive government spending. There were two principal reasons for this belief. First, many thought Beijing had finally opted for fundamental restructuring to grow the economy. Analysts hailed the issuance of the Communist Party’s November 2013 Third Plenum decision, which promised substantial reforms, as proof of the political victory of those favoring progressive change.

Fiscal spending, on the other hand, has been considered the antithesis of reform because investment-led growth—the result of that spending—would only take China further away from the ultimate goal of reform, a consumption-based economy. Second, analysts believed just about everyone in Beijing had come to the inescapable conclusion that former Premier Wen Jiabao’s crash stimulus program, authorized in late 2008, was a huge mistake, largely because it had resulted in grossly inefficient usage of capital, large asset bubbles, and far too much debt. Yet the universally accepted view that there would be no large stimulus was premised on the assumption that the economy would respond to small-scale stimulus.

The economy, unfortunately, has not. Perhaps the most indicative statistic to come out of Beijing in recent days is that, despite all the monetary loosening since the end of last year, there were only 707.9 billion yuan of new loans in April, down from 1.18 trillion yuan in March. The reason for the fall in new loans is clear. There is a fundamental lack of demand in China.

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“..a preliminary Reuters poll last week predicted adjusted Q1 U.S. GDP numbers due on Friday would be massively revised down and show a 0.7% contraction..”

• G7 Finance Ministers To Address Faltering Global Growth (Reuters)

Finance ministers from the world’s largest developed economies meet in Germany this week against a backdrop of faltering global growth, scant inflationary pressures and a bond market in turmoil. High on their agenda – even if unofficially – will be Greece and how it can stay in the troubled euro zone. Figures due on Friday from the United States that will almost certainly show the world’s biggest economy contracted last quarter are also likely to feature. “With the negotiations between Greece and the rest of the euro area at an impasse, an impatient German Chancellor Merkel has warned that an agreement must be reached before the end of the month,” said Thomas Costerg, senior economist at Standard Chartered.

Greece cannot make a payment to the IMF due on June 5 unless foreign lenders disburse more aid, a senior ruling party lawmaker said on Wednesday, the latest warning from Athens it is on the verge of default. Analysts largely agree the country’s cash squeeze is increasingly acute and fresh aid will be needed sooner or later to avoid bankruptcy. Merkel and French President Francois Hollande held talks on Thursday with Greek Prime Minister Alexis Tsipras on the sidelines of a European Union summit in Riga, hoping to speed the resolution of Athens’ debt crisis. With business growth slowing in the euro zone and factory activity contracting again in China, market watchers have been looking to the United States to drive a pick-up in growth.

But a preliminary Reuters poll last week predicted that adjusted first quarter U.S. GDP numbers due on Friday would be massively revised down and show a 0.7% contraction in the first three months of this year. “The poor Q1 2015 performance follows growth of just 2.2% in Q4 2014, so there has been very little growth over the last couple of quarters,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. “As a result, market participants have started to wonder again whether the U.S. economy might be in an extended period of secular stagnation.”

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And there should be.

• Schaeuble Expects Conflict at Dresden G-7 Over Austerity Policy (Bloomberg)

German Finance Minister Wolfgang Schaeuble expects a political tussle with his partners over austerity policy when G-7 finance ministers meet on May 27-May 29 in Dresden. Germany’s advocacy of budget cuts to heal euro-zone woes will come under attack at the meeting, Schaeuble said in a pamphlet distributed Saturday. The German government will face “demand-side” opponents of its policy in Dresden, he said without mentioning France or Italy or the U.S. “’Demand-side’ advocates will make clear in Dresden that cutting public spending leads to weaker demand for goods and services,” the minister said in a pamphlet distributed in the Dresden newspaper Saechsische Zeitung.

Germany’s position is that “solid public finance” boosts investment and growth, he said. Risks to Europe’s economic outlook stemming from the unresolved Greek crisis as well concern over the U.S. trade gap may fuse an alliance of France, Italy and the U.S. in Dresden. All three states fret that Germany’s rigorous advocacy of budget austerity may be holding back economic growth in Europe. U.S. Treasury Secretary Jacob J. Lew urged Germany to boost public investment to spur imports from Europe and spark a cycle of economic growth that would also benefit the U.S.

The U.S. trade gap widened in March to the biggest in more than six years while Germany in 2014 again reported a record surplus. The U.S. has also called for a quicker fix of Greece’s problems in a sign that it views Germany’s unmoving insistence that Greece fulfill bailout terms as a risk. Lew said Friday that failure to reach a deal quickly would create hardship for Greece, uncertainties for Europe and the global economy. Schaeuble remains adamant that Germany’s stance on sound budgeting is the right one, if unpopular. “Further convincing needs to be done” at Dresden, he said in his pamphlet.

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Next weekend is a holiday weekend in Greece. Fears of capital controls.

• Greece Hasn’t Got The Money To Make June IMF Repayment (Reuters)

Greece cannot make debt repayments to the IMF next month unless it achieves a deal with creditors, its interior minister said on Sunday, the most explicit remarks yet from Athens about the likelihood of default if talks fail. Shut out of bond markets and with bailout aid locked, cash-strapped Athens has been scraping state coffers to meet debt obligations and to pay wages and pensions. With its future as a member of the 19-nation euro zone potentially at stake, a second government minister accused its international lenders of subjecting it to slow and calculated torture. After four months of talks with its euro zone partners and the IMF, the leftist-led government is still scrambling for a deal that could release up to 7.2 billion euros ($7.9 billion) in remaining aid to avert bankruptcy.

“The four installments for the IMF in June are €1.6 billion. This money will not be given and is not there to be given,” Interior Minister Nikos Voutsis told Greek Mega TV’s weekend show. Voutsis was asked about his concern over a ‘credit event’, a term covering scenarios like bankruptcy or default, if Athens misses a payment. “We are not seeking this, we don’t want it, it is not our strategy,” he said. “We are discussing, based on our contained optimism, that there will be a strong agreement (with lenders) so that the country will be able to breathe. This is the bet,” Voutsis said. Previously, the Athens government has said it is in danger of running out of money soon without a deal, but has insisted it still plans to make all upcoming payments.

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The unbalance of global power.

• Greece’s Misery Shows We Need Chapter 11 Bankruptcy For Countries (Guardian)

Alexis Tsipras, Greece’s combative prime minister, is facing yet another week of fraught negotiations as he and his team struggle to agree a shopping list of economic reforms stringent enough to appease the country’s creditors, but different enough from the grinding austerity of the past five years to satisfy the Greek electorate. And all the while, bank deposits will leach out of the country, investment plans will remain on hold and consumers hammered by years of austerity will continue living hand to mouth. Change the actors – and the stakes – and it’s a tired plotline familiar to many governments across the world. According to Eurodad, the coalition of civil society groups that campaigns on debt, there have been 600 sovereign debt restructurings since the 1950s – with many governments, including Argentina for example, experiencing one wrenching write-off after another.

Many of these countries plunged deeper into recession as a result of the uncertainty and delay inherent in this bewildering process and the punishing austerity policies inflicted on them, with a resulting collapse in investor and consumer confidence. Argentina defaulted in 2001. Fourteen years later, it is still being pursued through the courts by so-called vulture funds, which buy distressed countries’ debts on the cheap and use every legal device they can to reclaim the money. Yet while the world’s policymakers have expended countless hours since the crisis of 2008 rewriting regulations on bonuses, mortgage lending, derivatives and too-big-to-fail banks, little attention has been paid to what should happen when a government is on the brink of financial meltdown.

Sacha Llorenti, the Bolivian ambassador to the UN, is currently touring the world’s capitals trying to change that. “We’re not just talking about a financial issue; it’s an issue related to growth, to development, to social and economic rights,” he says. The UN is not the obvious forum for discussing debt restructuring: unlike the IMF, it is not a lender of last resort with emergency cash to disburse, and doesn’t have a seat around the table when countries have to go to their creditors to ask for help. Yet also unlike the IMF, the UN general assembly is not dominated by the world’s major powers: each member country has one vote.

When Argentina tabled a motion calling for the UN to examine the issue of sovereign debt restructuring last autumn, 124 countries voted for it; 11, including the UK and the US, with their powerful financial lobbies, voted against; and there were 41 abstentions. Llorenti, who is chairing the UN “ad hoc committee” set up as a result of that vote, says the 11 countries that objected hold 45% of the voting power at the IMF. He believes they would prefer the matter to be tackled there, where they can shape the arguments: “It’s a matter of control, really.”

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Support for Syriza is still very high. But people are afraid to.

• Greeks Back Government’s Red Lines, But Want To Keep Euro (AFP)

Cash-strapped Greeks remain supportive of the leftist government’s tough negotiating style, according to a new poll published Sunday, but hope for a deal with creditors that will keep the euro in their wallets. The poll conducted in May by Public Issue for the pro-government newspaper Avgi, shows 54% backing the SYRIZA-led government’s handling of the negotiations despite the tension with Greece’s international lenders. A total 59% believe Athens must not give in to demands by its creditors, with 89% against pension cuts and 81% against mass lay-offs. The SYRIZA-led government is locked in talks with the EU, ECB and the IMF to release a blocked final €7.2-billion tranche of its bailout.

In exchange for the aid, creditors are demanding Greece accept tough reforms and spending cuts that anti-austerity Syriza pledged to reject when it was elected in January. According to reports, creditors are demanding further budget cuts worth €5 billion including pension cuts and mass lay-offs. Prime Minister Alexis Tsipras made clear on Saturday however that his government “won’t budge to irrational demands” that involve crossing Syriza’s campaign “red lines”. Greece faces a series of debt repayments beginning next month seen as all but impossible to meet without the blocked bailout funds. Failure to honour those payments could result in default, raising the spectre of a possible exit from the euro. That is a scenario Greeks hope to avert, with 71% of those polled wanting to keep the euro while 68% said a return to the drachma could worsen the economic situation.

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Yanies takes aim at the media.

• The Truth About Riga (Yanis Varoufakis)

It was the 24th of April. The Eurogroup meeting taking place that day in Latvia was of great importance to Greece. It was the last Eurogroup meeting prior to the deadline (30th April) that we had collectively decided upon (back in the 20th February Eurogroup meeting) for an agreement on the set of reforms that Greece would implement so as to unlock, in a timely fashion, the deadlock with our creditors. During that Eurogroup meeting, which ended in disagreement, the media began to report ‘leaks’ from the room presenting to the world a preposterously false view of what was being said within. Respected journalists and venerable news media reported lies and innuendos concerning both what my colleagues allegedly said to me and also my alleged responses and my presentation of the Greek position.

The days and weeks that followed were dominated by these false stories which almost everyone (despite my steady, low-key, denials) assumed to be accurate reports. The public, under that wall of disinformation, became convinced that, during the 24th April Riga Eurogroup meeting, my fellow ministers called me insulting names (“time waster”, “gambler”, “amateur” etc. were some of the reported insults), that I lost my temper, and that, as a result, my Prime Minister later “sidelined” me from the negotiations. (It was even reported that I would not be attending the following Eurogroup meeting, or that I would be ‘supervised’ by some other ministerial colleague.) Of course none of the above was even remotely true.

My fellow ministers never, ever addressed me in anything other than collegial, polite, respectful terms.
• I did not lose my temper during that meeting, or at any other point.
• I continue to negotiate with my fellow ministers of finance, leading the Greek side at the Eurogroup.
• Then came a New York Times Magazine story which raised the possibility of a recording of that Eurogroup meeting. All of a sudden, the journalists and news media that propagated the lies and the innuendos about the 24th April Eurogroup meeting changed tack. Without a whiff of an apology for the torrent of untruths they had peddled against me for weeks, they now began to depict me as a ‘spoof’ who had “betrayed” the confidentiality of the Eurogroup.

This morning I went on the record on the Andrew Marr television show (BBC1) on this issue. I am taking this opportunity to commit the truth in writing also here – on my trusted blog. So here it goes:

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Bruno is dead on.

• The Bloodied Idealogues vs. The Bloodthirsty Technocrats (StealthFlation)

On the grave Greek question, it appears that the moment of truth is finally upon us. After nearly four months of frenetic, fruitless and often feckless high level deliberations and negotiations, both sides remain essentially at an impasse, right where they started. The technocrats in Brussels want to see their austerity driven reform program carried forward and implemented unconditionally. As for the idealogues in Athens, they have pledged to put forth their own enlightened approach to rescue their sinking society. The Technocrats hold the purse strings, but the Ideologues hold the heart strings. For what it’s worth, that is typically a highly combustible combination, tick tock. With their recent cocksure bravado, are the Technocrats entirely misreading the desperate determination of the Idealogues?

Get ready for yet another Euro Summer swoon.. Everyone agrees that Greece, under a corrupt political oligarchy, grossly abused its privileges as a Eurozone member. In fact, with the help of a few sleazy sophisticated Goldman Sachs financiers, they actually cheated on their application forms in order to join the exclusive club to begin with. The illegitimate Ionian books were cooked from the get go, and it only got worse and worse over time. The self serving political elites and their self-seeking sponsors at multinational banks and corporations ran up a massive tab, while their ill-fated nation did not have the wherewithal to pay the astronomical bills. That is essentially what happened here. Oh, and the parties specifically involved all happened to personally get rather wealthy themselves along the way.

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National elections at the end of the year could reinforce the changes.

• Spain’s Ruling Party Battered In Local And Regional Elections (EUObserver)

Spain took a turn towards the new left in Sunday’s regional and local elections, putting an end to the dominating two-party system. Despite having won the most votes in the elections across Spain on Sunday (24 May), Prime Minister Mariano Rajoy’s centre-right PP party has lost all of its absolute majorities and will now often depend on coalitions and pacts with other parties. Compromises and coalitions between parties is new in Spain where more than 30 years of alternating power between the socialists and the conservatives is being challenged by an ncreasingly fragmented political system including anti-austerity party Podemos and centrist Ciudadanos.

The biggest changes have been the move towards the new left parties in Barcelona and maybe also in Madrid – depending on a possible pact between a Podemos-supporting coalition called Ahora Madrid and the Social Democrats (PSOE). It would be the first time the Spanish capital would have a leftwing Mayor in the last 25 years. “It is clear that a majority for change has won,” said Manuela Carmena, the 71 year-old emeritus judge of the Spanish Supreme Court who wants to become Madrid’s new mayor. She is one seat short of Madrid’s former conservative Mayor Esperanza Aguirre. However, with the support of Social Democrats – who came third – the two left-wing parties could together hold the absolute majority in Madrid. Barcelona’s new Mayor Ada Colau calls for “more social justice” and leads a coalition of left-wing parties and citizens’ organisations called ‘Barcelona en Comú’, which includes members of Podemos.

“We are proud that this process hasn’t just been an exception in Barcelona, this is an unstoppable democratic revolution in Catalonia, in [Spain] and hopefully in southern Europe,” Colau said last night after it became clear that she had won a small majority in the Catalan capital. Colau, a former anti-eviction activist, was one of the founders of a platform for people affected by mortgages – Plataforma Afectados por la Hipoteca (PAH) – which won the European Parliament’s European Citizens’ Prize in 2013. The PAH was set up in response to the hike in evictions caused by abusive mortgage clauses during the collapse of the Spanish property market eight years ago. Colau herself entered politics last year calling for “more and better democracy” and a clean-up of corruption in politics.

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Curious development?!

• Catalan Independence Bid Rocked by Podemos Victory in Barcelona (Bloomberg)

Catalan President Artur Mas’s bid to win independence from the rest of Spain was gasping for air on Sunday as voters in Barcelona ousted his party from city hall. Voters in the regional capital picked Podemos-backed activist Ada Colau as their next mayor, as the pro-independence parties Mas is aiming to lead to an overall majority in Catalonia won 45% of the vote. The regional leader has pledged to call an early regional election this year to prove to officials in Madrid the support for leaving Spain. “Mas is in deep trouble,” said Ken Dubin, a political scientist at the Instituto de Empresa business school in Madrid and Lord Ashcroft International Business School in Cambridge, England.

Colau, 41, gained national prominence during the financial crisis leading a campaign to stop banks evicting families from their homes after they defaulted on their mortgages. She joined forces with anti-austerity party Podemos, an ally of Greece’s governing party Syriza, for her assault on city hall. Her coalition, Barcelona en Comu, won 25% of the vote and 11 representatives in the 41-seat city assembly, the Spanish Interior Ministry said on its website. CiU won 10 seats compared with 14 in 2011. Barcelona accounts for about a third of the Catalan economy and hosts all the major regional institutions. “This result adds uncertainty to the planning process because it wasn’t considered a possibility,” said Jaume Lopez, a pro-independence political scientist at Pompeu Fabra University in Barcelona. “We will see whether that uncertainty becomes a problem.”

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So screwed…

• Auckland Nears $1 Million Average House Price (Guardian)

Economists in New Zealand have expressed alarm at a housing market boom which could soon see average prices of property in the country’s largest city pass the $1m mark. In Auckland, the cost of an average domestic property has risen from $550,000 during the last property boom in 2007 to nearly $810,000 now. House prices increased at a rate of 14% last year, while the rest of the country’s index remained stable. Some houses are increasing in value by $1,000 every day while 36 suburbs in the city now have an average house value of $1m or more. And at current rates the whole city’s average will be $1m within a year-and-a-half.

The National government has in part recognised the boom and taken action for the first time to tackle what many believe is a housing crisis. It announced a multimillion dollar development plan to build affordable homes, a move added to a previously announced tax on property speculators. But some economists believe more needs to be done, and while growth is expected to slow, that will merely move the $1m mark back a month or two. Small, one–bedroom apartments are selling for $800,000 and delapidated wrecks in barely desirable suburbs are fetching more than $1m. Senior research analyst Nick Goodall of property analytics company CoreLogic said: “It is inevitable the average price in Auckland will be $1m.”

In the past 15 years housing has seen a phenomenal investment in Auckland, as huge demand and limited supply has increased prices at record levels. Expensive land, and restrictions on building new and denser housing, has seen limited new stock come on the market. And a strong economy, record net migration, especially to Auckland, and banks happy to lend money in a market with significant capital gains, has seen people paying over the top of each other. “The narrative goes because it has been good in the last 10 or 15 years, it must be good forever,” said Shamubeel Eaqub, principal economist at the Institute of Economic Research. But it is impossible for this to continue, he says. “Auckland is in a massive bubble.”

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“.. it’s 8000% more expensive than normal cotton seed. But normal cotton seed is largely unavailable to Indian farmers because of Monsanto’s control of the seed market..”

• Monsanto’s GMO Cotton Problems Drive Indian Farmers To Suicide (RT)

Hundreds of thousands of farmers have died in India, after having been allegedly forced to grow GM cotton instead of traditional crops. The seeds are so expensive and demand so much more maintenance that farmers often go bankrupt and kill themselves. “Nationally, in the last 20 years 290,000 farmers have committed suicide – this as per national crimes bureau records,” agricultural scientist Dr. G. V. Ramanjaneyulu of the Center For Sustainable Agriculture told RTD, which traveled to India to learn about the issue. A number of the widows and family members of Indian farmers with whom the journalists have spoken have the same story to share: in order to cultivate the genetically modified cotton, known as Bt cotton, produced by American agricultural biotech giant Monsanto, farmers put themselves into huge debt.

However, when the crops did not pay off, they turned to pesticides to solve the problem – by drinking the poison to kill themselves. “My husband took poison. [On discovering him dead], I found papers in his pocket – he had huge debts. He had mortgaged our land, and he killed himself because of those debts,” one widow told RTD. “[He killed himself] with a bottle of pesticide… All because of the loans. He took them for the farm. He told our kids he was bankrupt,” another widow said. “He worked all day, but it was hard to make the field pay,” her daughter added. Farming GM crops in rural India requires irrigation for success. However, since rich farmers often distribute the seeds directly to the poorer ones, many smaller, less educated farmers are not aware of the special conditions Bt cotton requires to be farmed successfully.

“Bt cotton has been promoted as something that actually solves problems of Indian farmers who are cultivating cotton. But something that has been promoted as a crisis solution, creates even more problems,” agricultural scientist Kirankumar Vissa said. “There are many places where it is not suitable for cultivation. On the seed packages, Bt cotton seed companies say that it is suitable for both irrigated and non-irrigated conditions – this is basically deception of the farmers,” the scientist said, adding that Monsanto also spends huge amounts of money on advertising in India, with paid for publications not always clearly marked as such.

Saying that only Bt cotton is available in India, Alexis Baden-Mayer, political director of Organic Consumers Association, says this crop requires many inputs. “It is incredibly expensive; it’s 8,000% more expensive than normal cotton seed. But normal cotton seed is largely unavailable to Indian farmers because of Monsanto’s control of the seed market,” she told RTD, adding that India is now the fourth largest producer of genetically modified crops.

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Genetic diversity is huge.

• ‘Incredibly Diverse’, Endangered Plankton Provide Half The World’s Oxygen (SR)

After a three-and-a-half year, sometimes harrowing, sea voyage covering some 87,000 miles of ocean, a team of researchers from the Tara Oceans Consortium is revealing details of “the most complete description yet of planktonic organisms to date,” co-author of a study published in the journal Science, Dr. Chris Bowler from the National Center for Scientific Research in Paris, told BBC News. Plankton is the term for a myriad of microscopic species that are at the ground floor of the oceans’ food chain. One type, zooplankton, gives sustenance to larger organisms, which are then consumed by larger animals, and so on. Without the tiny zooplankton, marine life could not sustain itself. Another type of plankton, called phytoplankton, produce their own food the same way plants do: through photosynthesis.

This process not only sucks up heat-trapping carbon dioxide in the atmosphere, it produces oxygen upon which life on planet Earth depends. The researchers report collecting 35,000 samples from 210 sites around the world’s oceans. Their analyses reveal not only an astounding genetic diversity among the plankton—about 40 million genes, which is about four times more than are found in the human gut—but that these organisms contribute about 50% of all the world’s oxygen, according to report by Tech Times. “Plankton are much more than just food for the whales,” said Dr. Bowler, in a report by Reuters. “Although tiny, these organisms are a vital part of the Earth’s life support system, providing half of the oxygen generated each year on Earth by photosynthesis and lying at the base of marine food chains on which all other ocean life depends.”

But what worries scientists is that climate change and warming oceans are causing some plankton to die off, according several studies, including by researchers at two universities in the UK who published their 2013 study in the journal Nature Climate Change. This is because as oceans warm, the natural cycles of nitrogen, phosphorous, and carbon dioxide are disturbed—a disruption that negatively affects the plankton. Dr. Bowler and his team also found that many marine microorganisms are sensitive to variations in temperature, “and with changing temperatures as a result of climate change we are likely to see changes in this community,” he told the BBC. Because of the massive amount of DNA data now made available to scientists everywhere by the newly released study—only 2% so far has been analyzed, Bowler says—future research is sure to shed more light on the way marine ecosystems function.

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Debt Rattle May 14 2015

May 142015
 
 May 14, 2015  Posted by at 10:32 am Finance Tagged with: , , , , , , , , ,  6 Responses »


Walker Evans Street Scene, Vicksburg, Mississippi 1936

• The US Economy Is Signalling An Iceberg And We’re Out Of Lifeboats (Guardian)
• Central Banks Are Running Low on Ammunition (Bloomberg)
• America’s Future Got $7 Trillion Worse Since the Financial Crisis (Bloomberg)
• The US Economy Has Left Behind 20 Million Americans (MarketWatch)
• Epic Global Bond Rout Is A QE Success Story – But It Won’t Last (AEP)
• Foreign Money Pours Into US Real Estate, and It’s Not Just Houses (Bloomberg)
• Greece Will Stay In Euro Even If It Defaults, Renzi Adviser Says (Bloomberg)
• Greek Minister Sees ‘Only 10%’ Chance Of Failure In Creditor Talks (Bloomberg)
• Greek Government Mulls Reforms With Eye On Deal As Some Resist (Kathimerini)
• The Greek Bailout Crisis Didn’t Have to Happen (Slate)
• The World’s Top Currency Dealers Are ‘Untouchable’ (MarketWatch)
• Five Reasons Chicago Is in Worse Shape Than Detroit (Bloomberg)
• Many Americans Agree With Bernie Sanders’ Brand Of Socialism (MarketWatch)
• “We The People” Need To Circle The Wagons: The Government Is On The Warpath (ZH)
• The Secret Corporate Takeover Of Trade Agreements (Stiglitz)
• 2600 People Arrested Since 2012 Too Injured To Enter Baltimore Jail (CopBlock)
• Is The Only Purpose of a Corporation to Maximize Profit? (Bruce Bartlett)
• McCain, Saakashvili Appointed To Ukraine Reform Advisory Team (RT)
• Pope Francis to Congress: Capitalism Must Change (Bloomberg)
• Over 40% Of US Honeybee Colonies Died In The Past Year (WSJ)

“This could be the start of a worrying trend.” Huh? The start?

• The US Economy Is Signalling An Iceberg And We’re Out Of Lifeboats (Guardian)

As the economic news from the eurozone improves by a notch (although not in Greece, inevitably), US consumers are sending the opposite signal. Sluggish retail sales in the first quarter of the year were, we were told, caused by a cold snap. There would be a spring bounce, investors assumed, as supposedly confident Americans spent their windfalls from the lower oil price. Well, it didn’t happen in April: yesterday’s figures were flat, and the weather-related explanation is wearing thin. This could be the start of a worrying trend. Indeed, if Americans are preferring to use excess cash to pay down debt, it’s hard to see why they would change their minds now. The oil price has started to rise again and long-term bond yields are also on the up, reducing opportunities to remortgage at a cheaper rate.

Economists assume that this “soft patch” for the US economy is now so soggy that the US Federal Reserve will, again, postpone its attempt to raise interest rates. A hike next month is seen as a non-starter; it will come in September, at the earliest. But what if the run of weak numbers points to something more severe? On cue, HSBC economist Stephen King yesterday published a weighty analysis titled “the world economy’s titanic problem” that pointed out that it has been six years since the trough of the last US recession. “If history is any guide, we are probably now closer to the next one,” he said. Business cycles always turn, and after six years of growth, even at a pedestrian rate, the current recovery is old.

One could make the same point about the UK, where the economic weather tends to follow that of the US, with a lag. King’s point – which explains the Titanic reference – is that policymakers are out of lifeboats if a recession were to arrive. The US Fed has dealt with past recessions by cutting interest rates by at least five percentage points. That is obviously impossible today because rates are still on the floor. To change the metaphor, the arsenal is bare: “Whereas previous recoveries have enabled monetary and fiscal policymakers to replenish their ammunition, this recovery – both in the US and elsewhere – has been distinguished by a persistent ammunitions shortage,” says King. “This is a major problem.”

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Central banks should have stayed on the sidelines, but it’s too late now.

• Central Banks Are Running Low on Ammunition (Bloomberg)

“The world economy is like an ocean liner without lifeboats.” That’s the headline in HSBC Chief Economist Stephen King’s latest note. What he’s getting at is that with interest rates sitting at or near record lows in economies across the globe, central banks could be set for major struggles if the economy starts to sour.

If another recession hits, it could be a truly titanic struggle for policymakers. … Remarkably enough, it’s six years since the last recession, suggesting the next one may not be too far away, yet there is a total absence of traditional policy ammunition.

In past recoveries, policymakers on both the fiscal and monetary side have been able to raise rates and “replenish their ammunition,” as King puts it. This recovery has proved otherwise. King says this is a huge problem.

In all recessions since the 1970s, the US Fed funds rate has fallen by a minimum of 5 percentage points. That kind of traditional stimulus is now completely ruled out. Meanwhile, budget deficits are still uncomfortably large and debt levels uncomfortably high: while the US fiscal position has improved, it remains structurally weak.

Although the Federal Reserve is the most discussed, it’s not just the U.S. central bank that has embarked on this historical move. King notes that several other regions have similar narratives. The European Central Bank appears to be committed to quantitative easing until September 2016. The Bank of Japan is basically in the same boat. The Bank of England may not be increasing its balance, but it has yet to raise rates. Fiscal positions, meanwhile, are mostly poor, at least when compared with those pre-crisis. So what options do central banks actually have at this point?

Here’s what King’s report looks at:
• Reducing the risk of recession
• Reverting to quantitative easing
• Moving away from inflation targeting
• Using fiscal policy to replace monetary policy
• Using fiscal and monetary policy together in a bid to introduce so-called “helicopter money”
• Pushing interest rates higher through structural reforms designed to lower excess savings, most obviously via increases in retirement age.

Regarding his first point, how exactly can fiscal and monetary policy reduce the risk of the next recession? Well, it’s not easy. According to King, new safeguard regulations such as increasing bank capital might work in a narrow sense, but not every crisis is the same.

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And here’s the inevitable result of the Fed actions:

• America’s Future Got $7 Trillion Worse Since the Financial Crisis (Bloomberg)

Still feeling uncomfortable about that tax bill you owed last month? Think about it this way: If you didn’t pay it, America’s fiscal future would look even worse than it does now, six years out from the financial crisis. Driven by higher interest costs, Social Security and Medicare for baby boomers, as well as tax cuts made permanent in 2012, the federal debt held by the public is expected to hit $40 trillion in 2035, according to calculations by the Committee for a Responsible Federal Budget based on Congressional Budget Office estimates. Back in 2009, soon after President Barack Obama took office, the forecast for the 2035 burden was at least $7 trillion lower.

In 2035, the debt will almost equal the size of the U.S. economy; four years later it will match the previous record, set in 1946, at 106% of gross domestic product, the CBO estimated last year. Compare that to the 2014 debt burden of $12.8 trillion, or 74% of GDP.
The economy just isn’t growing fast enough to keep pace with the costs of caring for the soaring ranks of the elderly, and the discrepancy between spending and revenue is estimated to widen in the next few decades. Republicans say their proposal passed by Congress last week will save $5 trillion and balance the budget within a decade. The Obama administration likes to tout how it’s reduced the budget deficit by three-fourths and is on track to narrow further.

Either way, the number of people paying Social Security taxes is expected to grow more slowly than the number of those receiving the entitlements. The number of taxed workers will increase 20% between now and 2045, while beneficiaries of Social Security’s Old-Age, Survivors and Disability Insurance (OASDI) funds will increase 57% over the same period, according to the Social Security Board of Trustees. As a result, there will be about two taxpayers per beneficiary in three decades, down from almost three now. For comparison, the same ratio was 3.4 to 1 in 2000.

Higher spending on debt servicing and entitlements means less money for other purposes, such as education or research. It also means some hard decisions at some point. In order to prevent debt from becoming an even bigger portion of GDP, the U.S. needs to increase taxes by 7.5% or cut spending by 7%, said Marc Goldwein, vice president and policy director of the Committee for a Responsible Federal Budget, a Washington advocacy group. To bring the ratio more in line with the historical level of 40%, taxes would have to go up 13.5%, according to Goldwein. The later any action is taken, the deeper the spending cuts or the higher the tax increases would have to be.

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Classic lowballing.

• The US Economy Has Left Behind 20 Million Americans (MarketWatch)

Last month, when Baltimore was burning after a young African-American man died in police custody (six officers were subsequently charged), I did a Google search to find what David Simon thought about it. Simon, a former reporter for the Baltimore Sun, was the creator and show runner of “The Wire,” which ran for five seasons on HBO and which Entertainment Weekly called the greatest television show ever. It was a brilliant narrative of the struggle for survival in a violent, drug-riddled Baltimore neighborhood much like the one that went up in flames. In my search, I came across an interview Simon did with Bill Moyers a few years ago in which he declared: “ ‘The Wire’ was not a story about America; it’s about the America that got left behind. … These really are the excess people in America. Our economy doesn’t need them — we don’t need 10% or 15% of our population.”

Have 10% to 15% of the U.S. population really been left behind? I contacted Simon at his website to ask where he got the number, but he didn’t get back to me. So I did my own calculations, and he’s actually not too far off. With a little help from the Labor Department’s Bureau of Labor Statistics, which produces the famous monthly jobs reports, I added up several categories of the unemployed, the underemployed and people on some form of public assistance. My conclusion: About 20 million Americans, roughly 10% of adults of working age, have at best marginal ties with the U.S. economy. I excluded the elderly, because most of them are retired and getting Social Security, and children, whose lives and futures are often collateral damage in the economic struggles of their parents.

Here’s how it adds up:
• 2.5 million are among the long-term unemployed, which the Labor Department defines as being out of work and actively seeking work for 27 weeks or more. That’s less than half what it was in 2009, but it’s still high.
• 6.6 million Americans are working part-time for economic reasons but would prefer to work full time.
• Another 2.1 million are marginally attached to the labor force, according to the Labor Department. That means they are “not in the labor force [but] want and are available for work, and … have looked for a job sometime in the prior 12 months.”
• Nearly 5 million adults from age 18-64 are collecting Supplemental Security Income (SSI) disability benefits, which go to people who can’t work because of various disabilities.
• Almost 1 million adults receive public assistance from Temporary Assistance to Needy Families (TANF) and General Assistance (GA), according to the U.S. Census Bureau. Those are temporary cash payments with some work requirements that replaced the old welfare system under welfare reform. • In 2013, 3.3 million Americans earned the federal minimum wage or less, according to the Pew Research Center. If you think they haven’t been left behind, try living on $7.25 an hour. Grand total: 20.4 million adults. Now, there is some overlap, and Labor Department figures are for people from 16 to 64, while the other stats cover those from 18 up. But those caveats aside, 20 million is a reasonable ballpark number — and a disturbing one.

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No, Ambrose, this is the sound of failure.

• Epic Global Bond Rout Is A QE Success Story – But It Won’t Last (AEP)

Occam’s Razor is the sharpest way to cut through tangled explanations for the epic rout in global bond markets. The simplest explanation is the best. “Frustra fit per plura quod potest fieri per pauciora.” Bond yields are soaring because the world’s central banks have demonstrably done enough for now to stop deflation taking hold. The short-term monetary cycle is turning. The reflation trade is on. The broad M3 money supply has been growing at a 7pc rate in the US over the past six months (annualized), and nearly 8pc in the eurozone. Fiscal austerity has run its course as well. Budget policy is no longer contractionary in either of the world’s two biggest economic blocs. Unless the normal mechanisms of monetary policy have broken down altogether – which is possible, but would you bet your pension on it? – the burgeoning M3 data point to a reflationary revival of some sort later this year.

John Williams, the once dovish head of the San Francisco Fed, told Yahoo! Finance on Tuesday that the US economy is “running a little bit hot”. Rightly or wrongly, he chose to dismiss the economic relapse in the first quarter as a weather-blip. The world’s monetary superpower is chomping at the bit. Hedge funds were asking for trouble by driving yields on 10-year German Bunds to a historic low of 0.07pc in mid-April. Trouble is what they got. Three weeks later, Bunds are trading at 0.65pc. The paper losses across the spectrum of global bond markets is roughly half a trillion dollars. Put another way, Bank of America says the €2.8 trillion of eurozone debt trading at negative yields has just shrunk to €2 trillion. It calls this a “positioning purge”.

The mistake was to bet on an acute shortage of sovereign bonds once the European Central Bank launched its €60bn monthly blitz of quantitative easing. Bunds were thought to have a special “scarcity premium” since they are dying out. The German government is running a fiscal surplus of 0.5pc of GDP this year. Markets ignored known evidence that bond yields rose by 80-120 basis points during the various bouts of QE in America, which is what one would expect as recovery builds and the risk of deflation abates. Contrary to mythology, QE does not work by lowering bond rates. It works through a different mechanism: by causing banks to “create” money.

ECB president Mario Draghi has accomplished his first goal, even if he might silently be cursing the newfound strength of the euro. The eurozone is clawing its way out of depression. The growth rate of nominal GDP growth has risen from 1.1pc at the start of the year to 1.5pc, subtly altering long-term debt dynamics for the crisis states of southern Europe. They are no longer quite so close to a debt-deflation trap. The one-year “inflation swap rate” – measuring expectations – has jumped by almost 100 basis points since October in the eurozone. The five-year contracts are starting to catch up. This is a short-term cyclical upswing. It does not in itself narrow Europe’s North-South rift in competitiveness, and does not magically turn EMU into an optimal currency area. It does buy time.

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We accept monopoly money.

• Foreign Money Pours Into US Real Estate, and It’s Not Just Houses (Bloomberg)

Blockbuster real estate deals are back and breaking records as cash from around the globe pours into U.S. office buildings, apartment complexes and other investment properties. Commercial real estate transactions jumped 45% by dollar volume in the first quarter, an increase driven by sales of multiple buildings or entire companies, according to research firm Real Capital. Since then, GE. agreed to sell real estate assets to Blackstone and Wells Fargo in a deal valued at about $23 billion, the largest property purchase since the financial crisis. As the pot of money set aside for U.S. commercial real estate grows, competition for the best properties is pushing investors to buy in bulk.

Based on the pipeline, which includes the GE deal, the second quarter may be one of the biggest on record for property transactions, according to Real Capital. “It’s so hard to get things on a single-asset basis,” said Janice Stanton, an executive managing director at commercial brokerage Cushman & Wakefield. “You’re starting to see larger and larger transactions.” Real estate deals surged to $129 billion during the three months through March, marking the most active start to a year since 2007, according to Real Capital. The largest was Blackstone’s $8.1 billion sale of IndCor Properties, an owner of industrial buildings, to GIC Pte, Singapore’s sovereign-wealth fund. Demand for property from warehouses to skyscrapers is booming, helped by more than six years of Federal Reserve efforts to stimulate economic growth by keeping interest rates low, and stockpiles of cash from overseas investors seeking a haven.

About $24 billion in foreign capital flowed to U.S. properties in the first quarter, more than half the total for all of 2014, according to Cushman. That number is poised to grow further because the majority of sovereign wealth funds – investors such as GIC – have yet to hit their target allocations for real estate, according to Preqin Ltd., an alternative-assets research firm. Total property allocations for such funds now top $6.3 trillion, more than double the amount in 2008, London-based Preqin said in a report this month. Surging prices for the best buildings in big cities such as New York and San Francisco are driving the real estate recovery. Centrally located office towers are fetching prices 33% above records set in 2008, according to an index from Real Capital and Moody’s.

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“In the face of an extraordinary event, you would also witness some extraordinary support” for Greece..”

• Greece Will Stay In Euro Even If It Defaults, Renzi Adviser Says (Bloomberg)

Greece will remain in the euro even if it fails to meet a debt payment, according to Italian Prime Minister Matteo Renzi’s economic adviser. Filippo Taddei, a key aide to Renzi during his overhaul of the euro region’s third biggest economy, said that “nobody knows” whether Greece can meet its debt obligations from one day to the next. As a result, “plans are being set” at European level to mitigate the effect of a Greek default, he said in an interview in Rome on Tuesday. “It’s an intellectual and analytical mistake to think that a default on Greek debt would automatically bring Greece out of the euro,” Taddei said. “The euro is not just an economic project but has a strong political project, and it is very hard to envisage a united currency without Greece.”

Taddei’s comments are the strongest public indication yet that Greece’s euro-area creditors are preparing a plan in case Prime Minister Alexis Tsipras’s government is unable to meet a payment on its outstanding debt. The Greek economy returned to recession in the first quarter, European Union statistics showed on Wednesday, two days after Finance Minister Yanis Varoufakis said that Greece will run out of cash within a couple of weeks unless it gets help. Italy, which saw 10-year bond yields soar to more than 7% in November 2011 at the height of the debt crisis, would again suffer “additional volatility,” if Greece got into more difficulty, Taddei said. Similar Italian debt yielded about 1.82% [today]. “In the face of an extraordinary event, you would also witness some extraordinary support” for Greece, Taddei said.

Plans are being drawn up in “the proper European” forums to prepare for a possible default. While Taddei declined to be drawn on specifics, he said that European institutions were now “a lot more attentive, a lot more ready to respond” to such volatility than during previous financial crises. “We all learned that European institutions in general were not very active and were not very quick at addressing the crisis, or the shock, or the consequences of the crisis. But I think that lesson has been learned and now there is increased awareness that you have to react quickly,” Taddei said. “We will be ready to act.” That includes taking part in any third rescue package for Greece. Italy, he said, “will always take part in any effort to safeguard the euro.”

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“I’m sorry to say that this huge cost for the economy is the basic negotiating weapon of the other side..”

• Greek Minister Sees ‘Only 10%’ Chance Of Failure In Creditor Talks (Bloomberg)

The chances of a breakdown between Greece and its creditors are small, as neither of the two sides is willing to risk the breakup of the euro area, Greece’s administrative reform minister said. “I estimate that the chances of rift are only 10%, as I have faith that reason will prevail,” George Katrougalos, 52, said in a telephone interview from Athens on Tuesday. “We are in a trajectory heading towards agreement for the simple reason that neither of the two sides wants a rift.” Europe’s most indebted state is locked in talks with its creditors over the terms attached to its €240 billion bailout. Uncertainty over the country’s future in the euro area has triggered a liquidity squeeze, which pulled the economy back into a double-dip recession.

“We have moved from Grexit to Grimbo, as Greece is in limbo,” said Katrougalos, who is also a professor of public law. “This liquidity crunch, which is caused by the European Central Bank not adhering to its responsibilities, doesn’t allow the Greek economy to grow.”Without access to capital markets, Greek lenders are bleeding deposits and relying on €80 billion of Emergency Liquidity Assistance, extended by the country’s central bank, to stay afloat. The European Central Bank, which can block the ELA provision, has so far resisted the Greek government’s demands to allow Greek lenders to buy more treasury bills, as the use of central bank funds to finance the state would go against EU treaties.

Sorbonne-educated Katrougalos said the ECB’s stance and the refusal of euro-area member states to disburse bailout funds are tactics creditors are using to force the Greek government to capitulate to their demands.“I’m sorry to say that this huge cost for the economy is the basic negotiating weapon of the other side,” the minister said. “They bring time limits to reach a deal to the brink, as a negotiating tactic. This is not proper behavior among partners.”Despite the lengthy negotiations, the minister believes a compromise will be reached. “Only if the logic in the back of the minds of some of our peers – which says that a government of the left shouldn’t be allowed to succeed – only then we will not reach an agreement,” he said.

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‘Emergency’ meetings are a daily event.

• Greek Government Mulls Reforms With Eye On Deal As Some Resist (Kathimerini)

The government’s strategy in negotiations with creditors and a raft of possible measures, including tax reforms, that could form the basis of an agreement, dominated a marathon cabinet meeting on Wednesday chaired by Prime Minister Alexis Tsipras. The meeting, which ran late into the night, was aimed at examining a wide range of changes to the tax system as well as possible privatizations ahead of technical-level talks that are due to resume in Brussels on Thursday. Officials also discussed the possible timing for drafting some of these changes into legislation in a bid to show good will and convince the European Central Bank to relax liquidity restrictions on Greece.

Comments by cabinet members earlier in the day gave a mixed picture of the government’s intentions with some insisting that it remained focused on reaching a deal while others suggested there should be no compromise with the demands of Greece’s creditors, despite the increasingly tight liquidity situation. Speaking in Parliament, Energy Minister Panayiotis Lafazanis, who heads SYRIZA’s radical Left Platform, said, “This government will not surrender,” noting that “those who believe we will step back from our red lines are deluding themselves.” He was referring to SYRIZA’s pre-election pledges to protect pensions and the rights of workers.

Another senior member of the Left Platform was widely quoted in the media as saying that Greece will be unable to reach a deal with creditors this month as the latter “keep yanking our chain” and that Greece might be forced to “go it alone.” Interior Minister Nikos Voutsis appeared more conciliatory. “We are working toward an honorable compromise,” he told Mega TV. “Immediate recourse to a referendum or elections is not in our plans right now.” Finance Minister Yanis Varoufakis caused a stir earlier in the day when he said he could not guarantee that the government would be in power next January. He said his comments, which were in response to a question from one of hundreds of ministry cleaning staff who were rehired by the new administration, had been blown out of proportion.

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Without a restructuring blueprint, smaller parties will always get creamed.

• The Greek Bailout Crisis Didn’t Have to Happen (Slate)

Everyone knows that bailouts have become overly politicized. The U.S. bailout during the financial crisis, which cemented “too big to fail” in the public consciousness, triggered hostility that helped spur a Republican landslide in the 2010 midterms. Now imagine if every one of the 900,000 or so commercial and consumer bankruptcy filings in the U.S. last year triggered bailouts. Creditors would eventually elbow each other for repayments; mayhem would ensue. In Greece the bailout has been marked by malfeasance, infighting, and decision-fumbling. A 2013 IMF report claimed that the fund underestimated the problems austerity might cause to the Greek economy and that Greece did not qualify on three of its four criteria before receiving the initial three-year, €30 billion loan.

The report also noted that the stimulus prioritized the health of Europe’s banking system over the Greek economy. For example, an early debt write-off was delayed for political reasons because of countries whose banks held Greek bonds. Debt restructuring, or an effort to renegotiate the terms and provisions of a debt, could be a valuable alternative to bailouts, or transfers of finances by a governmental body to rescue an entity that is not meeting its financial obligations. That’s because creditors aren’t impartial. Take the European Central Bank. It’s an invested stakeholder in the current standoff, with a €104 billion exposure that roughly equals 65% of Greek’s GDP.

In a way, it’s understandable that in early February, the ECB’s Governing Council removed a waiver that allowed Greece’s banks to post government debt as collateral for cash. But that led Greece to become reliant on emergency funds to stay afloat. Greek stocks then fell by as much as nearly 30% the following day, and depositors triggered a bank run. There have been many increases to the emergency ceiling, which is now €80 billion. The ECB has similarly strong-armed Ireland and Cyprus. It’s not that the ECB is wrong to pursue rules that benefit the eurozone; the terms of Greece’s bailout could still be changed midstream, but doing so would create legal headaches and other complications for the eurozone.

It’s that while bailouts may evoke a rescue operation of sorts for sovereign debtors, they can play out far differently. When countries like Greece risk going bankrupt, it can be an opportunity for bottom-feeding purchasers of distressed sovereign debt. Such private creditors, especially short-termers, might then either hock to another entity such as the ECB or IMF or hold on to assets and litigate until they recover those assets’ value. There ends up being not much of a rescue, but financial power plays that favor certain interests and assets over others. That has been one of the big criticisms of the Greek bailout. In March an IMF director reportedly told Greek’s Alpha TV that rescue funds were used for banks in France and Germany rather than to keep Greece afloat.

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Too big to touch. Break them down.

• The World’s Top Currency Dealers Are ‘Untouchable’ (MarketWatch)

The world’s five largest foreign-exchange brokers ceded a significant chunk of their market share over the past year as regulators pressured them to shrink their operations while investigations into exchange-rate manipulation heated up. But though these dealers have retreated slightly, regulators will find it difficult to break their hold on the market, which they’ve dominated for decades, said analysts at Greenwich Associates, a research firm that, among other things, tracks changes in the foreign-exchange market’s structure. Three of the top five banks (Citigroup, Barclays and J.P. Morgan) are expected to plead guilty to charges of foreign-exchange manipulation, according to The Wall Street Journal. A fourth, UBS, which was the first to cooperate with investigators, will likely reach a settlement.

Maybe one or two more banks will join the ranks of the Deutsche Banks and Citigroups of the world, said Kevin McPartland, head of research for market structure and technology at Greenwich Associates. But a more extreme redistribution of market share is unlikely because of the sheer scale of investment needed to be a player in the massive foreign-exchange market, where turnover is measured in the trillions. “There will probably be more competition than there was in the past, but it’s hard to compete with the scale,” said McPartland said.

Many of the top dealers have a huge advantage when it comes to infrastructure. The top banks developed their own proprietary electronic-trading platforms years ago. They also have branches all over the world, which large clients find reassuring. Many of their smaller rivals depend on multi-dealer e-trading platforms, which pool liquidity from a consortium of banks. The market share of the top five banks shrank to 51%, from 53% in the past year, compared with 45% in 2011. The next five banks’ market share increased from 22% to 24%, while the banks that round out the bottom 10 of the 20 largest dealers saw their share rise from 14% to 15%. The rest of the market is controlled by smaller players.

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There goes your pension plan.

• Five Reasons Chicago Is in Worse Shape Than Detroit (Bloomberg)

Forget all the nicknames attached to Chicago for generations – Windy City, City of Big Shoulders, the City that Works. This gleaming metropolis of 2.7 million people is now, along with Detroit, junk city. When Moody’s Investors Service downgraded Chicago’s debt on Tuesday to junk status, it deepened the city’s financial crisis and elevated comparisons to the industrial ruin 280 miles to the east. Chicago partisans, starting with Mayor Rahm Emanuel, argue vehemently that their city isn’t Detroit. They cite population growth, a diverse economy bolstered by an abundance of Fortune 500 companies, vibrant neighborhoods and a booming tourist trade. Yet here are five reasons, now more than ever, that suggest Chicago is akin to Detroit – or, by some measures, even worse. Or, as Illinois Republican Governor Bruce Rauner put it last month: “Chicago is in deep, deep yogurt.”

BIG, SCARY NUMBERS: Chicago’s unfunded liability from four pension funds is $20 billion and growing, hitting every city resident with an obligation of about $7,400. Detroit’s, whose population of about 689,000 is roughly a quarter of Chicago’s, had a retirement funding gap of $3.5 billion, meaning each resident was liable for $5,100. A January 2014 report from Morningstar Municipal Credit Research showed that among the 25 largest cities and Puerto Rico, Chicago had the highest per-capita pension liability.

HOSTILE COURT: When Detroit filed for Chapter 9 in July 2013, a federal bankruptcy judge exerted his considerable powers and decreed that everyone – taxpayers, employees, bondholders and creditors alike – would get a haircut to settle the crisis. When the Illinois Supreme Court ruled on May 8, it said the state couldn’t cut pension benefits as part of a solution to restructure the state retirement system. That decision sent a clear signal to Chicago, which was trying to follow the state’s benefit-cutting lead. Where the Detroit judge acted, the Illinois justices told elected officials to clean up the mess of their own making.

POLITICAL PARALYSIS: Just as Detroit slid into bankruptcy after decades of economic and actuarial warnings, Chicago politicians have watched the train wreck rumble toward them for more than a decade. During that time, they skipped pension payments and paid scant attention to the financial damage being done. In 10 years starting in 2002, the city increased its bonded debt by 84%, according to the Civic Federation, which tracks city finances. That added more than $1,300 to the tab of every Chicago resident. In Michigan, Governor Rick Snyder acted when the crisis in Detroit couldn’t be avoided. He invoked a state law giving an emergency manager what amounts to fiscal martial-law power. In Chicago’s case, there’s no political pressure to invoke a similar law.

NO BAILOUT: Detroit’s bankruptcy filing allowed it to restructure its debt, officially snuffing out $7 billion of it by cutting pensions and payments to creditors. In Illinois, the nation’s lowest-rated state with unfunded pension obligations of $111 billion, Rauner had a blunt message last week in an unprecedented address to Chicago’s City Council: The city will get no state bailout.

DENIAL: After years of denial, Detroit officials finally, if grudgingly, agreed to major surgery. At least for now, Chicago’s Emanuel is sticking to his view that the Illinois Supreme Court’s rejection of a state pension reform law doesn’t apply to the city. “That reform is not affected by today’s ruling, as we believe our plan fully complies with the State constitution because it fundamentally preserves and protects worker pensions,” he said in a statement on Friday. Four days later, Moody’s begged to differ. “In our opinion,” it wrote, “the Illinois Supreme Court’s May 8 ruling raises the risk that the statute governing Chicago’s Municipal and Laborer pension plans will eventually be overturned.”

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“..the American public — crushed by stagnant wages, robbed of middle-class jobs by competition with low-wage countries, deprived of health care, burdened by student debt..”

• Many Americans Agree With Bernie Sanders’ Brand Of Socialism (MarketWatch)

John Nichols, a writer for The Nation, titled his 2011 book, “The ‘S’ Word: A Short History of an American Tradition…Socialism,” precisely because, he said, “it is the subject of daily derision, a derision that is at once more intense and more ignorant than at any point in the long history of the United States.” That is due in no small part to the sharp right turn taken by the Republican Party and the steady stream of right-wing blather on radio and television, where “socialist” is used as shorthand for big government, welfare, high taxes, and any other nefarious policy Rush Limbaugh and his cohorts care to attach to it. But it is also due to the residue of the long Cold War demonization of communism and the failure of centrally planned economies in the Soviet Union, Eastern Europe, Cuba, and China.

Of course, the Marxism-Leninism of those countries is only one strand of a progressive socialist tradition that also includes social democracy in its various forms, which is still a vital political force in most European countries — most prominently in Scandinavia. Comfortable in the conviction that the U.S. is the biggest, strongest economy in the world with the highest standard of living, Americans have for decades tended to sneer at these European countries as inferior, bogged down economically by anti-business policies. But it is slowly dawning on wide portions of the American public — crushed by stagnant wages, robbed of middle-class jobs by competition with low-wage countries, deprived of health care, burdened by student debt and the astronomical costs of a college education — that this supposed superiority of ours is no longer true, if it ever was.

And that’s just the middle class. The rapidly growing pool of families below the poverty line, forced to work two or three jobs at subsistence wages just to scrape by, is also waking up to the fact that the famous “American dream” is no longer theirs. George Stephanopoulos, the ABC anchor whose career began as an aide to Democratic presidential candidate Bill Clinton in the 1990s, did a little sneering of his own recently when he interviewed Sanders on “This Week.” “I can hear the Republican attack ad right now,” Stephanopoulos said after Sanders expounded on the benefits of universal health care, a living wage, free higher education, access to child care, guaranteed pensions and other benefits enjoyed in “socialist” countries. “He wants America to look more like Scandinavia.”

Sanders blinked away his astonishment and replied, “That’s right. That’s right. And what’s wrong with that? What’s wrong when you have more income and wealth equality? What’s wrong when they have a stronger middle class in many ways than we do, a higher minimum wage than we do, and they’re stronger on the environment?”

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“This vital truth, that the government exists for our benefit and operates at our behest, seems to have been lost in translation..”

• “We The People” Need To Circle The Wagons: The Government Is On The Warpath (ZH)

Despite what some special interest groups have suggested to the contrary, the problems we’re experiencing today did not arise because the Constitution has outlived its usefulness or become irrelevant, nor will they be solved by a convention of states or a ratification of the Constitution. No, as I document in my new book Battlefield America: The War on the American People, the problem goes far deeper. It can be traced back to the point at which “we the people” were overthrown as the center of the government. As a result, our supremacy has been undone, our authority undermined, and our experiment in democratic self-governance left in ruins. No longer are we the rulers of this land.

We have long since been deposed and dethroned, replaced by corporate figureheads with no regard for our sovereignty, no thought for our happiness, and no respect for our rights. In other words, without our say-so and lacking any mandate, the point of view of the Constitution has been shifted from “we the people” to “we the government.” Our taxpayer-funded employees—our appointed servants—have stopped looking upon us as their superiors and started viewing as their inferiors. Unfortunately, we’ve gotten so used to being dictated to by government agents, bureaucrats and militarized police alike that we’ve forgotten that WE are supposed to be the ones calling the shots and determining what is just, reasonable and necessary.

Then again, we’re not the only ones guilty of forgetting that the government was established to serve us as well as obey us. Every branch of government, from the Executive to the Judicial and Legislative, seems to be suffering this same form of amnesia. Certainly, when government programs are interpreted from the government’s point of view (i.e., the courts and legislatures), there is little the government CANNOT do in its quest for power and control. We’ve been so brainwashed and indoctrinated into believing that the government is actually looking out for our best interests, when in fact the only compelling interesting driving government programs is maintain power and control by taking away our money and control.

This vital truth, that the government exists for our benefit and operates at our behest, seems to have been lost in translation over two centuries dominated by government expansion, endless wars and centralized federal power. Have you ever wondered why the Constitution begins with those three words “we the people”? It was intended to be a powerful reminder that everything flows from the citizenry. We the people are the center of the government and the source of its power. That “we” is crucial because it reminds us that there is power and safety in numbers, provided we stand united. We can accomplish nothing alone.

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Joe’s late to the game, and has little to add. And if your claim to fame is your link to Bill Clinton, you may want to take a deep breath.

• The Secret Corporate Takeover Of Trade Agreements (Stiglitz)

When I chaired Bill Clinton’s council of economic advisers, when he was president, anti-environmentalists tried to enact a similar provision, called “regulatory takings”. They knew that once enacted, regulations would be brought to a halt, simply because government could not afford to pay the compensation. Fortunately, we succeeded in beating back the initiative, both in the courts and in the US Congress. But now the same groups are attempting an end run around democratic processes by inserting such provisions in trade bills, the contents of which are being kept largely secret from the public (but not from the corporations that are pushing for them). It is only from leaks, and from talking to government officials who seem more committed to democratic processes, that we know what is happening.

Fundamental to America’s system of government is an impartial public judiciary, with legal standards built up over the decades, based on principles of transparency, precedent, and the opportunity to appeal unfavourable decisions. All of this is being set aside, as the new agreements call for private, non-transparent, and very expensive arbitration. Moreover, this arrangement is often rife with conflicts of interest; for example, arbitrators may be a judge in one case and an advocate in a related case. The proceedings are so expensive that Uruguay has had to turn to Michael Bloomberg and other wealthy Americans committed to health to defend itself against Philip Morris. And, though corporations can bring suit, others cannot. If there is a violation of other commitments – on labour and environmental standards, for example – citizens, unions, and civil society groups have no recourse.

If there ever was a one-sided dispute-resolution mechanism that violates basic principles, this is it. That is why I joined leading US legal experts, including from Harvard, Yale, and Berkeley, in writing a letter to Barack Obama explaining how damaging to our system of justice these agreements are. American supporters of such agreements point out that the US has been sued only a few times so far, and has not lost a case. Corporations, however, are just learning how to use these agreements to their advantage. And high-priced corporate lawyers in the US, Europe, and Japan will likely outmatch the underpaid government lawyers attempting to defend the public interest. Worse still, corporations in advanced countries can create subsidiaries in member countries through which to invest back home, and then sue, giving them a new channel to bloc regulations.

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Damning.

• 2600 People Arrested Since 2012 Too Injured To Enter Baltimore Jail (CopBlock)

Over 2600 people arrested by Baltimore police since 2012 were too injured to enter the city’s detention center, jail records show. The Baltimore Sun reports that according to records, 123 of the detainees who weren’t admitted had visible head injuries, the third-most common ailment cited by officials while others had broken bones, facial trauma and lacerations. While the records do not indicate how the people were injured or whether they suffered their injuries at the hands of police, they do suggest that officers either ignored or did not notice the injuries. The report comes in the wake of the death of Freddie Gray last month, who died of a broken neck prosecutors say he suffered while riding in the back of a Baltimore police van. Six of the officers involved are facing criminal charges, including one charged with second-degree murder.

The incident sparked protests and rioting in the city, before Friday, when the U.S. Justice Department launched a civil-rights investigation into the department. Critics say the figures show that Baltimore police officers take little interest in detainees after they are arrested. This may result, law enforcement experts say, from officers not receiving adequate training to detect injuries or whether or not a detainee is faking being hurt in order to avoid jail. The United States Constitution guarantees health care to suspects before they are booked into jail. In the Gray case, prosecutors say the man requested medical care five times before his death. The Sun previously reported that dozens of Baltimore residents have accused the city’s police of inflicting injuries on them and disregarding their requests for medical help. The city has paid out almost $6 million in court judgments and settlements in response to over 100 lawsuits filed since 2011.

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Corporations have accumulated too much political power to allow for justice or common sense.

• Is The Only Purpose of a Corporation to Maximize Profit? (Bruce Bartlett)

Historically, corporations were expected to serve some public purpose as justification for the benefits and privileges they receive from the state. But since the 1970s, the view has become widespread that corporations exist solely to maximize profits and for no other purpose. While the shareholder-first doctrine was supposed to solve the agency problem, in fact it has gotten worse as corporate executives enrich themselves at the expense of shareholders. Moreover, the obsession with current share prices as the only measure of corporate success may be destroying long-term value as companies cut back on investment to raise short-term profits. Tax policies designed to raise after-tax profits have done nothing to reverse these trends.

To conservatives, the corporation is often treated as the pinnacle of capitalist development. This justifies their deferential treatment of corporations in terms of taxation and government regulation, which, they claim threaten to kill the goose that lays golden eggs. In reality, the corporation wouldn’t exist in a pure free market. It is and always has been a creature of the state. For many years, corporate status was only granted to businesses deemed to be in the public interest, such as companies that built turnpikes and canals. But as time has gone by, the idea that corporations exist at the pleasure of the state and in the public interest has been forgotten.

Today, it is widely believed that corporations exist for the sole purpose of making a profit. Corporate executives who believe corporations have a social responsibility are considered old fashioned. But the costs of this new view of the corporation have been very high in terms of lost jobs and investment, and minuscule wage growth for more than a generation. Shareholders, the owners of the corporation, haven’t even benefitted that much from the laser-like focus on profit above all else because much of it has been siphoned off by corporate executives, who have enriched themselves at the expense of shareholders, and financial institutions that have encouraged companies to become highly leveraged.

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Put the crazies in charge!

• McCain, Saakashvili Appointed To Ukraine Reform Advisory Team (RT)

Georgia’s fugitive ex-president Mikhail Saakashvili and hawkish US Senator John McCain have been approved as members of the newly-formed International Advisory Group that will help Ukraine’s president in “conducting reforms.” Saakashvili has been appointed as head of the new advisory group, says the statement on Ukraine’s presidential website. The list of members included in the advisory group mostly includes current and former European politicians. Among them are the German member of the European Parliament and the current Chairman of the European Parliament Committee on Foreign Affairs Elmar Brok, Sweden’s former Prime and Foreign Minister Carl Bildt, former Prime Minister of Slovakia Mikulas Dzurinda, and Lithuania’s former Prime Minister Andrius Kubilius.

Back in February Saakashvili was appointed as a non-staff adviser to Poroshenko. The ex-Georgian president, who was in power from 2004 to 2013, faces numerous charges at home, including embezzlement of over $5 million, corruption and brutality against protesters during demonstrations in 2007. Georgia’s Chief Prosecutor’s Office launched proceedings to indict Saakashvili and place him on the international most wanted list, but Kiev refused to hand over the fugitive president, despite an existing extradition agreement between Ukraine and Georgia. Saakashvili is known for his strong anti-Russian stance, which garnered heavy US support. In August 2008 during his term in office Georgia launched an offensive against South Ossetia, killing dozens of civilians and Russian peacekeepers stationed in the republic.

Georgia’s shelling of Tskhinval prompted Russia to conduct a military operation to fend off the offensive. Despite Saakashvili’s claims that the conflict was “Russian aggression,” the 2010 EU Independent Fact Finding Mission Report ruled that Tbilisi was responsible for the attack. Meanwhile Senator John McCain, for years spearheading the anti-Russian and particularly anti-Putin crusade, said that while he “would love to do anything” to help Ukraine, he has not yet cleared his new appointment under the US Senate rules. “I was asked to do it both by Ukraine and Saakashvili and I said I would be inclined to do it but I said I needed to look at all the nuances of it, whether it’s legal under our ethics and all that kind of stuff,” McCain told BuzzFeed.

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Too late.

• Pope Francis to Congress: Capitalism Must Change (Bloomberg)

Pope Francis will denounce the inequalities of capitalism when he becomes the first pontiff to address Congress on his visit to the U.S. in September, according to his closest adviser. Cardinal Oscar Andres Rodriguez Maradiaga, a fellow Latin American whom the Argentine pope has appointed to advise him on governing the church, said in an interview in Rome that Francis will speak “not as an enemy of the system or of the culture” but “as a shepherd who wants to make the world better, especially for those who do not have a voice.” On his election as leader of 1.2 billion Catholics, Francis called for “a poor church for the poor,” setting a humbler tone for his papacy that began with his decision to live in a modest residence.

At the same time, he’s set out an ambitious political agenda, from lobbying for a global climate accord to decrying the widening gap between rich and poor. Francis will present the lawmakers with “the same way of thinking that he expressed” in Evangelii gaudium, his first 2013 encyclical, or major papal writing, according to Maradiaga. In that document, Francis attacked the “idolatry of money” and a financial system “of exclusion and inequality,” adding: “Such an economy kills.” Free-market laws aim to “to produce the biggest revenue possible and the lowest costs possible,” Maradiaga, 72, said on Wednesday. “Change is needed, making capitalism more human, otherwise inequalities will continue growing and inequalities produce violence, frustration, pain and especially insecurity in every sense.”

Maradiaga, the archbishop of Tegucigalpa, Honduras, expressed the hope that the Republican-dominated Congress will hear the pope “with open hearts.” Francis, 78, will travel to Cuba Sept. 19-22, and then to Washington, where he will meet with President Barack Obama at the White House, to New York, where he will address the United Nations General Assembly, and finally to Philadelphia. The White House said in a March statement that the discussion between Francis and Obama will include “caring for the marginalized and the poor” and “advancing economic opportunity for all.” As the Vatican’s spokesman on developing countries’ debt at the IMF and the World Bank, Maradiaga helped negotiate a writedown for his native Honduras in the 1990s.

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“For the first time since the survey began five years ago, the summer loss rates exceeded the winter loss rates..”

• Over 40% Of US Honeybee Colonies Died In The Past Year (WSJ)

More than 40% of U.S. honeybee colonies died in a 12-month period ending in April, extending a troubling trend that has scientists scrambling for a solution and professional beekeepers struggling to stay in business. The Agriculture Department said in its annual honeybee survey released Wednesday that beekeepers are starting to lose large numbers of bees during both the summer and winter—presenting scientists with a new wrinkle since die-offs had generally occurred during the cold winter months. “I think the situation is changing,” said Dennis vanEngelsdorp, an expert on honeybees at the University of Maryland. “It remains bad but I don’t know if we can assume the same thing is happening year to year.”

For the first time since the survey began five years ago, the summer loss rates exceeded the winter loss rates, suggesting bees are becoming vulnerable during a time of the year they were thought to be healthy and robust. The most recent summer loss rate reached 27%, up from 20%. While the precise cause of the honeybee crisis is unknown, scientists generally blame a combination of factors, including poor diets and stress. Some bees die from infestations of the Varroa mite, a bloodsucking parasite that weakens bees and introduces diseases to the hive. Environmental groups also point to a class of pesticides known as neonicotinoids.

In April, the Environmental Protection Agency said it would stop approving new outdoor uses for those types of chemicals until more studies on bee health are conducted. During the one-year period ending in April, beekeepers lost 42% of their colonies, according to the survey, marking the second-highest rate of loss since the Agriculture Department began tracking annual statistics in 2010. The loss rate was up from 34% during the previous 12-month period. Bee deaths present a considerable challenge to professional beekeepers, who spend substantial amounts of time and money to replenish their colonies. Many beekeepers, already in their 50s and 60s, are considering early retirement or are being forced out of the business due to the expense.

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Central Banks Are Crack Dealers and Faith Healers

Mar 102015
 
 March 10, 2015  Posted by at 11:18 am Finance Tagged with: , , , , , , , , , , ,  11 Responses »


William Henry Jackson Tunnel 3, Tamasopo Canyon, San Luis Potosi, Mexico 1890

The entire formerly rich world is addicted to debt, and it is not capable of shaking that addiction. Not until the whole facade that was built to hide this addiction must and will come crashing down along with the corpus itself.

Central banks are a huge part of keeping the disease going, instead of helping the patient quit and regain health, which arguably should be their function. In other words, central banks are not doctors, they’re crack dealers and faith healers. Why anyone would ever agree to that role for some of the world’s economically most powerful entities is a question that surely deserves and demands an answer. But no such answer is forthcoming.

Instead, we all pretend Yellen, Kuroda and Draghi are in fact curing us of our ailments. Presumably because that feels better. That our health deteriorates in the process is simply ignored and denied. But then, that’s what you get when you allow for a bunch of shaky goalseeked economic rules to be taken as some sort of gospel. People one thought leeches healed too, or bloodletting, exorcism, burning at the stake, you name it. Same difference, just a few hundred years later.

What’s happening today is that central bankers start to find that their goalseeked ideas are no longer working. What might work for one may backfire for another. That this might be the direct result of their own mindless policies will never even cross their minds. And so they will continue making things worse, until that facade they operate on cannot hold any longer.

The EU started its braindead QE program yesterday. If it gets to purchase the entire €1.14 trillion in bonds it aims for, that will be a bad thing. If it doesn’t, that will be an arguably worse thing. Draghi should have stayed away from this heresy, but it’s too late now: the die is cast.

Why banks and funds would sell their long maturity bonds, with a relatively high yield, to him, is not clear. On the other hand, that many funds will compete with the ECB for the few bonds that are available, is clear. Draghi simply attempts to turn the sovereign bond market into casino with zero price discovery. Whether he will succeed in that is not clear. To get it done, though, he will have to make some very peculiar moves. That again is clear. Durden:

Presenting The Buyers Of Over 100% Of New German And Japanese Bond Issuance

Back in December, when the total amount of annual ECB Q€ was still up in the air and and consensus expected a lowly €500 billion annual monetization number, we calculated that based on Germany’s capital key contribution of about 26%, the ECB would monetize some €130 billion of German gross issuance, or about 90% of the total scheduled issuance for 2015. Subsequently, the ECB announced that the actual amount across all ECB asset purchasing programs, will be some 44% higher, or €720 billion per year (€60 billion per month). So what does that mean for the revised bond supply and demand across two of the most important developed markets?

Well, we already know that the Bank of Japan will monetize 100% or just over of all Japanese gross sovereign bond issuance (source). As for Germany, on a run-rate basis, and assuming allocation based on the abovementioned capital key, it means that for the next 12 month period, assuming no major funding changes in Germany, the ECB will swallow more than a whopping 140% of gross German [Bund] issuance! Or, said otherwise, the entities who will buy more than all gross German and Japanese issuance for the next 12 months, are the ECB and the Bank of Japan, respectively.

This also means that to fulfill its monthly purchase mandate, the ECB will have to push the price to truly unprecedented levels (such as the -0.20% yield across the curve discussed previously, or even lower) to find willing sellers. That said, please don’t tell your average Hinz and Kunz that more than all German bond issuance in 2015 will be monetized. It will bring back some very unpleasant memories.

Japan’s Abenomics are a huge failure, and so it looks like another double or nothing is in the offing. They’ll keep doing it until they can’t, because that’s their whole repertoire. Though it is a little weird to see Bill Pesek, and BoJ chief Kuroda, claim that Japan’s QE failed because it wasn’t big enough. Seen Japanese debt numbers lately, Bill? Not big enough yet?

Three Reasons Japan Will Get More Stimulus

With annualized growth of 1.5% between October and December after two straight quarters of contraction, Japan is hobbling out of recession far more slowly than hoped. A third dose of quantitative easing is almost certain. Here are three reasons why.

First, the initial rounds of QE weren’t potent enough. “In order to escape from deflationary equilibrium, tremendous velocity is needed, just like when a spacecraft moves away from Earth’s strong gravitation,” Kuroda recently explained. “It requires greater power than that of a satellite that moves in a stable orbit.”

Although the Bank of Japan managed to lower the value of the yen by more than 20% beginning in April 2013, that clearly hasn’t provided enough of a boost to the economy.

Maybe you can’t boost the 20-year coma the Japanese economy has been in by hammering the currency? Just a thought, Bill. And sure, Kuroda’s spacecraft metaphor is mighty cute, but what tells you economies are just like rocket ships? I like this piece from Deutsche Welle much better:

Central Bank Blues

On Monday the European Central Bank begins its long-anticipated program to buy sovereign bonds on secondary bond markets – i.e. previously issued government bonds held by institutional investors like banks or insurance funds. In central bankers’ jargon, this is called “quantitative easing,” or QE. The ECB’s plan is to pump €60 billion euros into the financial markets each month, by trading central bank reserve money (a form of electronic cash) for bonds. That’s set to continue until at least September 2016, which means at least €1.1 trillion will be put into the hands of investment managers – who will have to find some alternative investments to make with the money.

On Thursday last week, at the ECB’s governing board meeting in Nicosia on Cyprus, the central bank revised its projections for both GDP growth and inflation in the eurozone upward: The inflation rate is projected to go up to 0.7% for this year, and GDP growth from 1.0 to 1.5%. But are the new projections just a case of whistling in the dark? There are in fact serious doubts as to whether the ECB will actually be able to meet its targets, or if, instead, the bond-purchasing program will have effects that will make a structural recovery of the eurozone more difficult.

For a start, many observers doubt whether the ECB will even be able to find willing sellers for €60 billion a month of bonds. Sovereign bonds – especially those of the core eurozone member states, like Germany – may soon become rather scarce on secondary markets. Neither domestic banks and insurance funds, nor foreign central banks, will have much incentive to sell their government bond holdings to the ECB. The older bonds with long maturities and decent interest rates, in particular, will probably be held rather than sold. Moreover, experts question whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.

It probably won’t lead to any boost in their lending activities to real-economy businesses or households, for two reasons: First, banks have recently been obliged to increase their core capital reserves – the amount of shareholders’ money, including retained earnings, which is available to cover possible loan losses – and they’re still adjusting their balance sheets accordingly. That means they’re being cautious about lending.

That’s the basic question, isn’t it? “..whether a flood of central bank reserve money, pumped into the hands of players in secondary financial markets, can generate a stimulus at all.” But how do we answer it? Lots of people will want to point to the ‘success’ story of the US and the Fed, but there’s no way we can have any confidence in the numbers coming from the US. As for the EU and Japan, the failures are more obvious, but that may be because they’re less skilled in ‘massaging’ the data. All in all, the evidence, if it exists at all, is flimsy at best.

Oh, and then there’s China:

China’s ‘Money Garrote’ May Choke Us All

In this new era of all-powerful central banks, it is hard for investors to look past who will be next to take out the big gun of quantitative easing. This week, all eyes are on the ECB, which follows the Bank of Japan as the latest of the major monetary-policy makers to embark on its own aggressive bond-buying program. In contrast, China appears to be entering a “new normal” era, in which its central bank only has a pea-shooter [..] the benchmark money-supply growth target of 12% was the lowest in decades. Another part of China’s new normal is not just lower growth, but also an era where the central bank is no longer able to magically speed its money-printing presses.

Conventional wisdom holds that the People’s Bank of China (PBOC) has a gargantuan monetary arsenal, given that the country has the world’s largest stash of foreign reserves at $3.89 trillion [..] according to some analysts, this reserve accumulation is merely a byproduct of another form of quantitative easing. Rather than strength, its size indicates just how staggeringly large China’s domestic credit expansion has become in recent decades. According to strategist Albert Edwards at Société Générale, such foreign-reserve accumulation — which typically takes place in emerging markets — is equivalent to quantitative easing.

The PBOC’s historic mass-printing of money to buy foreign currency and depress the yuan’s value is little different from what the Federal Reserve and others have done, Edwards said. [..] the recent reversal in such reserve accumulation points to a significant turning point in monetary conditions. Indeed, Joe Zhang, author of “Inside China’s Shadow Banking System,” argues that China’s credit expansion has in fact been far more aggressive than the QE attempted in the U.S. or Europe.

Zhang, a former PBOC official, calculated that China’s money supply is already 372% of what it was at the beginning of 2006. And if you add up official data between 1986 and 2012, China’s benchmark M2 money supply has grown at a compound rate of 21.1%. While 7% economic growth is slow for China compared to the double-digit rates of the past, such data makes 12% money-supply growth looks positively measly. Another reason to believe that China is at the tail end of a huge monetary expansion is found in a recent study by McKinsey. They estimated that total credit in China’s economy has quadrupled since 2008, reaching 282% of GDP.

But now the conditions that enabled this debt habit have turned. Edwards argues that foreign-exchange accumulation by central banks is the key measure of global liquidity to pay attention to — and it is currently in free-fall. [..] while markets are focusing on the ECB’s easing announcement, they are missing this Chinese liquidity garrote that is strangling the global economy. Data from the IMF shows that central-bank foreign-reserve accumulation has been declining rapidly. China is at the center of this, with a $300 billion annualized decline over the last six months

The stress point for China is now its currency, which has fallen to a 28-month low against the dollar. The dilemma facing the PBOC is how to keep growth and liquidity sufficiently strong, while also maintaining its loose currency peg to a resurgent dollar. As China defends its currency regime, it must do the opposite of printing new money: using foreign reserves to buy yuan, contracting the money supply in the process.

The People’s Bank of China is a crack dealer with a client that no longer can afford its fix. Or perhaps it’s more accurate to say that all central banks are now crack dealers with such clients, and the PBOC is the first one that’s forced to admit it. And it now looks as if perhaps it can’t win back its market without spoiling it. And that is all about the dollar. A lot is about the dollar, and the looming shortage of them. And there’s nothing (central) banks can do. Not that they won’t try, mind you. Durden:

The Global Dollar Funding Shortage Is Back With A Vengeance

[..].. one can be certain that the current fx basis print around – 20 bps will most certainly accelerate to a level never before seen, a level which would also hint that something is very broken with the financial system and/or that transatlantic counterparty risk has never been greater. Unlike us, JPM hedges modestly in its forecast where the basis will end up:

.. different to previous episodes of dollar funding shortage such as the ones experienced during the Lehman crisis or during the euro debt crisis, the current one is not driven by banks. It is rather driven by the monetary policy divergence between the US and the rest of the world. This divergence appears to have created an imbalance in funding markets and a shortage in dollar funding. It is important to monitor how this dollar funding shortage and issuance patterns evolve over time even if the currency implications are uncertain.

And to think the Fed’s cheerleaders couldn’t hold their praise for the ECB’s NIRP (as first defined on these pages) policy. Because little did they know that behind the scenes the divergence in Fed and “rest of the world” policy action is leading to two things: i) the fastest emergence of a dollar shortage since Lehman and ii) a shortage which will be arb[itrage]ed to a level not seen since Lehman, and one which assures that over the coming next few months, many will be scratching their heads as to whether there is something far more broken with the financial system than merely an arbed way by US corporations to issue cheaper (hedged) debt in Europe thanks to Europe’s NIRP policies.

If and when the market finally does notice this gaping dollar shortage (as is usually the case with the mandatory 3-6 month delay), the Fed will once again scramble to flood the world with USD FX swap lines to prevent the global dollar margin call from crushing a matched synthetic dollar short which according to some estimates has risen as high as $10 trillion.

Until then, just keep an eye on the Fed’s weekly swap line usage, because if the above is correct, it is only a matter of time before they are put to full use once again. Finally what assures they will be put to use, is that this time the divergence is the direct result of the Fed’s actions…

And then, again with Tyler, we return to Albert Edwards:

“Ignore This Measure Of Global Liquidity At Your Own Peril”

With all eyes squarely on the ECB as Mario Draghi prepares to flood the EMU fixed income market with €1.1 trillion in new liquidity starting Monday, Soc Gen’s Albert Edwards reminds us that “another type of QE” is drying up thanks largely to the relative strength of the US dollar. The printing of currency to buy US dollar denominated assets in an effort to prop up “mercantilist export-led growth models [is] no different to the Fed’s QE,” Edwards says, explicitly equating EM FX intervention with the asset purchase programs employed by the world’s most influential central banks in the years since the crisis. Via Soc Gen:

Clearly when the dollar is declining sharply, global FX intervention accelerates as the Chinese central bank, for example, needs to debauch its own currency at the same rate. Conversely, when the dollar rallies strongly, as is the case now, FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies,

.. and ultimately the entire over-inflated global financial complex… The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off, with the most direct and immediate effect being felt in emerging economies.

The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is a clear tightening of global liquidity. Traditionally these periods of dollar strength are highly disruptive to emerging markets and often end in the weakest links blowing up the entire EM and commodity complex and sometimes much else besides! Investors ignore this at their peril.

So: the ECB has started doing its painfully expensive uselessness , the Fed refuses to do anymore and even threatens to derail the whole idea by hiking rates, both Japan and its central bank are so screwed after 20 years of having an elephant sitting on their lap for afternoon tea that nothing they do makes any difference anymore even short term, and China is faced with the riddle that what it thinks it should do to look better in the mirror mirror on the Great Wall, only makes it look old and bitter.

But as Edwards rightly suggests, the first bit of this battle will be fought in, and lost by, the emerging markets. And there will be nothing pretty about it. They’re all drowning in dollar denominated loans and ‘assets’, and it gets harder and more expensive all the time to buy dollars as all this stuff must be rolled over. And the game hasn’t even started yet.

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